S. HRG. 111–705 

HEARING WITH SECRETARY TIMOTHY GEITHNER 

HEARING 

BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

HEARING HELD IN WASHINGTON, DC, JUNE 22, 2010 

Printed for the use of the Congressional Oversight Panel 

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HEARING WITH SECRETARY TIMOTHY GEITHNER 


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62–218 2010

S. HRG. 111–705 

HEARING WITH SECRETARY TIMOTHY GEITHNER 

HEARING 

BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

HEARING HELD IN WASHINGTON, DC, JUNE 22, 2010 

Printed for the use of the Congressional Oversight Panel 

( 


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C O N T E N T S 

Page 

Opening Statement of Elizabeth Warren, Chair, Congressional Oversight 

Panel ..................................................................................................................... 1 

Statement of J. Mark McWatters, Member, Congressional Oversight Panel ..... 5 

Statement of Damon Silvers, Deputy Chair, Congressional Oversight Panel .... 11 

Statement of Kenneth R. Troske, Member, Congressional Oversight Panel ...... 14 

Statement of Richard H. Neiman, Member, Congressional Oversight Panel ..... 19 

Statement of Hon. Timothy F. Geithner, Secretary, U.S. Department of the 

Treasury ................................................................................................................ 23 


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HEARING WITH SECRETARY TIMOTHY 

GEITHNER 

TUESDAY, JUNE 22, 2010 

CONGRESS OF THE UNITED STATES, CONGRESSIONAL OVERSIGHT PANEL, Washington, DC. 

The Panel met, pursuant to notice, at 10:03 a.m. in Room SD– 

192, Dirksen Senate Office Building, Elizabeth Warren, Chair of 

the Panel, presiding. 

Present: Ms. Warren, Mr. Neiman, Mr. Silvers, Mr. McWatters, 

and Dr. Troske. 

OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, 

CONGRESSIONAL OVERSIGHT PANEL 

Chair WARREN. This hearing of the Congressional Oversight 

Panel is called to order. 

Good morning, Mr. Secretary. We appreciate your returning here 

to testify before the Congressional Oversight Panel for the fourth 

time. 

Since your last appearance here, the panel has issued six more 

reports, bringing our total to 20. Our latest reports have covered 

a great deal of territory from the Government’s interventions in 

specific companies such as GMAC and AIG and its broader efforts 

to shore up entire markets such as small business lending and 

housing. 

The breadth of our reports reflects in many ways the breadth of 

your ambitions. Under your leadership, Treasury has launched at 

least a dozen distinct programs to address different aspects of the 

financial crisis. It seems clear that these efforts have had an important impact: markets have calmed greatly since the turbulent 

fall of 2008. 

But the size and scope of these programs also reflects the variety 

of severe strains on our financial system. About 3,000 banks and 

six of our largest financial institutions are dangerously exposed to 

the faltering commercial real estate market. Many more banks still 

have not digested the toxic assets, the toxic mortgages on their balance sheets, and are now facing new demands to pay off bad mortgages they sold to Fannie and Freddie. The financial problems of 

these banks are straining their ability to lend to small businesses 

that might otherwise be driving the economic recovery and reducing unemployment, and finally, it seems clear that Treasury’s efforts to reduce mortgage foreclosures is not working. 

As the TARP’s end date approaches, this panel must know 

whether Treasury has carefully monitored the financial system to 


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assess potential risks. We must also evaluate whether Treasury 

has diligently measured the impact of its efforts, using credible 

metrics to measure the success or the failure of its programs. Put 

another way: Has Treasury administered TARP with the highest 

possible degree of transparency and accountability? 

After all, reasonable people may approve or disapprove of your 

plan to stop foreclosures, but no one questions that its progress 

should be measured against clear benchmarks for success. Yet, 

Treasury has provided no such benchmarks. 

Reasonable people may define financial stability in different 

ways, but everyone agrees that we can best gauge that stability by 

rigorously measuring the condition of our banks. Yet, Treasury has 

refused to call for additional stress tests in our financial system. 

Reasonable people may disagree about how to help small businesses gain access to loans, but no one doubts that the solution 

must begin with a clear understanding of the problem. Yet, Treasury has gathered only sparse data on the small business credit 

crunch. 

So the point is blunt: Without more candid data on bank stability, on commercial real estate, small business lending, and home 

mortgage foreclosure efforts, the shape and depth of the risks facing our economy remain hidden. And without more willingness to 

separate programs that have worked from those that have not, it 

is not possible to build the best defenses. 

The problems in commercial real estate, small business lending, 

and home mortgage foreclosure grow more urgent by the day. In 

only three months, your office will lose the capacity to substitute 

better programs for those that have failed or to develop new programs to deal with coming risks. I will be very glad to see the 

TARP end. But I realize that time is running out to make certain 

that we have used this money to assure the stability of our financial system. Time is also running out to make certain that TARP 

money is used to help families and small businesses the way it was 

so quickly used to help Wall Street. 

Before we proceed with the Secretary’s testimony, I would like to 

offer my colleagues on the panel an opportunity to make their own 

opening remarks. 

Mr. McWatters. 

[The prepared statement of Chair Warren follows:] 


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STATEMENT OF J. MARK MCWATTERS, MEMBER, 

CONGRESSIONAL OVERSIGHT PANEL 

Mr. MCWATTERS. Thank you, Professor Warren. 

I very much appreciate the attendance of the Secretary and I 

look forward to hearing your testimony. 

It is my hope that Secretary Geithner will assist the panel in addressing a number of interesting questions, including the following. 

Is Treasury contemplating the allocation of additional TARP 

funds to any new programs or the allocation of additional TARP 

funds to any existing programs? 

Is Treasury contemplating the allocation of TARP funds to any 

financial or nonfinancial institution, such as AIG, Citigroup, Chrysler, GM, or GMAC? 

Will the taxpayers receive repayment in full—in cash—of their 

TARP investments in these institutions, as well as other TARP recipients? 

What is Treasury’s exit strategy with respect to these institutions, as well as the other TARP recipients? 

Has TARP enshrined into our law the concept of ‘‘too big to fail’’? 

In other words, has TARP established an implicit guarantee from 

the Federal Government for the benefit of our largest financial and 

nonfinancial institutions? 

Will the pending financial reform legislation ratify and codify the 

implicit guarantee standard? 

Would Treasury yet again allocate additional TARP funds to 

Goldman Sachs, AIG, Citigroup, Bank of America, and a group of 

other systemically significant firms if they notified Treasury today 

that they were experiencing a severe liquidity and solvency crisis? 

How would the answer change if these institutions approached 

Treasury and the New York Fed after the pending financial reform 

legislation is enacted? Would the FDIC proceed to liquidate these 

institutions in an orderly and complete manner? And if so, are 

these institutions too interconnected with the global financial system to liquidate without triggering a cascade of unintended consequences? 

Is this not what we were told in the last quarter of 2008 with 

respect to Goldman, AIG, Citi, Bank of America, among others, 

that certain institutions were simply too big to fail and as such 

could not under any circumstances be permitted to liquidate? 

In such an event, is the resolution authority included in the 

pending financial reform legislation merely a modified TARP II 

bailout mechanism dressed up as resolution authority? 

AIG was regulated by approximately 400 domestic and international regulators and they, along with Wall Street, Main Street, 

and most investment professionals completely missed the vast systemic risks that were percolating within AIG. How will the addition of one more regulator, a systemic regulator, proposed under 

the pending financial reform legislation help to solve this problem? 

Where do Treasury, the FDIC, the SEC, and the CFTC expect to 

find these all-omniscient, sage-like, super-regulators who are competent to cull out systemic risk that others have missed? 

Even if the super-regulators timely identify such a risk, how will 

they convince Wall Street, Main Street, other regulators, the global 

financial community, and Congress that the risks are, indeed, leVerDate Mar 15 2010 21:37 Dec 02, 2010 Jkt 062218 PO 00000 Frm 00011 Fmt 6633 Sfmt 6602 E:\HR\OC\B218.XXX B218

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gitimate and worthy of prompt action at great cost to the taxpayers 

and the financial community? 

Why did former Federal Reserve Chair Volcker in an interview 

on CNBC, and as reported by the Huffington Post, state that the 

resolution authority provided in the proposed financial package is 

a ‘‘workable proposition for anything short of the biggest banks’’? 

Does Chairman Volcker believe that it will be all but impossible to 

liquidate in an effective manner the ‘‘too big to fail’’ financial institutions during the next financial crisis? Does he believe that TARP 

II will be required? 

Why did Treasury on June 11 issue a press release implying that 

the TARP program has been profitable? Even the Treasury itself 

expects the taxpayers to lose over $105 billion from their investments in the program, and the Congressional Budget Office expects 

the taxpayers to lose approximately $109 billion. 

Why did Ed Whitacre, the CEO of General Motors, imply in a television commercial that GM has repaid all of its TARP funds even 

though the taxpayers have yet to receive repayment in cash for approximately $40 billion of TARP funds advanced to GM? And the 

Congressional Budget Office projects the taxpayers will lose approximately $34 billion of their TARP-funded investments in GM, 

Chrysler, and GMAC. 

Thank you, Mr. Secretary, for joining us today. I look forward to 

our discussion. 

[The prepared statement of Mr. McWatters follows:] 


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Chair WARREN. Thank you. 

Deputy Chair Damon Silvers. 

STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, 

CONGRESSIONAL OVERSIGHT PANEL 

Mr. SILVERS. Yes, good morning and thank you, Chair Warren. 

Like my fellow panel members, I wish to express my great appreciation to Secretary Geithner for his willingness to appear before 

this panel on a regular basis to discuss the progress of the Treasury Department’s efforts under the Emergency Economic Stabilization Act. 

Today I think that the Treasury Department and Secretary 

Geithner deserve significant credit for the overall course of the performance of the assets the Government has acquired through 

TARP. 

As my colleague, Mr. McWatters, has pointed out in a somewhat 

different tone, the cost of TARP continues to fall and is now estimated to be less than a third of what Treasury thought it would 

be a year ago. And while it is hard to know exactly how to understand the full costs of the financial bailout, combining TARP with 

other government interventions such as the activities of the Federal Reserve, the public should be aware that the real cost of TARP 

is not at this point $700 billion or even the $300 billion that it was 

thought to be a year ago, but rather something like $100 billion, 

and it is falling pretty consistently. 

However, there remain three very significant questions that have 

been with us since the inception of TARP. 

The first is, is TARP working to achieve its economic goals, reviving credit markets, stabilizing the financial system, and providing 

meaningful relief to homeowners facing foreclosure? Projections of 

long-term double-digit unemployment and continued high rates of 

foreclosure suggest we may not have really repaired our business 

credit system or our housing markets. 

Second, are we continuing to manage TARP’s assets effectively, 

particularly in relation to the most troubled of TARP’s recipients 

and the riskiest aspects of the TARP portfolio. I am here particularly addressing AIG, Citigroup, and PPIP. I am recused from auto, 

so I am not raising that matter. 

Third, are we taking to heart in the process of regulatory reform 

the lessons from TARP? As Congress’ conference committee takes 

up the Wall Street Accountability Act of 2009, I am particularly 

mindful of the lessons of our panel’s detailed examination of the 

collapse of AIG in our June report, the lessons for regulatory reform. That report on AIG is a powerful brief for the wisdom of 

keeping government-insured liabilities, whether that is insurance 

policies or bank deposits, away from highly risky assets such as derivatives and leveraged equities and for the need for a strong resolution authority for systemically significant institutions, a need 

which you, Mr. Secretary, have championed I think much to the 

public’s benefit. 

It is a challenge for this panel to evaluate TARP really against 

two different metrics, both of which are profoundly important. 

One is TARP as literally a set of investments that the public has 

made in financial institutions and in certain other firms, evaluated 


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against much the same metrics that any investment would be 

measured against. 

The second is really the purpose of TARP, which was to ensure 

that the financial system did not take our economy down. We have 

moved, as our chair has noted, from an environment where the 

threat really was acute to, I believe, a situation where the threat 

from our financial system and the weaknesses in it is chronic. And 

that, I think, is really what I hope we can take up today, in addition to the other two subjects I mentioned a moment ago. 

Again, my thanks to the Secretary for his agreeing to once again 

appear before us, and I look forward to his testimony. 

[The prepared statement of Mr. Silvers follows:] 


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Chair WARREN. Thank you. 

Dr. Troske. 

STATEMENT OF KENNETH R. TROSKE, MEMBER, 

CONGRESSIONAL OVERSIGHT PANEL 

Dr. TROSKE. Thank you, Chair Warren. 

So I would like to start again, as the other panel members have 

done, by thanking Treasury Secretary Geithner for appearing before us today. 

As the newest member of the panel, I have not gotten a chance 

to hear you testify before us, and I am looking forward to hearing 

your thoughts about the financial crisis we have just been through 

and what we can expect going forward. 

In my opening statement today, I would like to focus on questions I still have about why financial markets in this country have 

not behaved as I believe they should have if they were truly a well 

functioning, competitive market. I have spent most of my professional life studying how markets function, but there are several aspects about these firms, these markets, and the recent financial crisis that I find both surprising and confusing. I would not have expected to see the events that we have seen if financial markets 

truly were well functioning, competitive markets. 

While I have not been closely involved in studying this sector, 

you, Secretary Geithner, are someone who has played a key role in 

dealing with the financial crisis and also are trying to understand 

how to prevent a similar crisis from occurring in the future. I feel 

that one of the main purposes of the panel is to comment on the 

long-run implications of TARP and to comment on the effectiveness 

of TARP in minimizing the size of the financial crisis. So your insights are obviously valuable as we try to accomplish these goals. 

One of the aspects of the financial sector I find confusing is the 

existence of systemically risky or ‘‘too big to fail’’ firms. The argument has been made repeatedly that the Government needed to 

step in and bail out firms such as AIG or Citigroup because the 

standard bankruptcy process is slow and disruptive and if these 

firms had been allowed to enter this process, it would have resulted 

in enormous disruptions in financial markets. 

Of course, U.S. bankruptcy laws have been in existence for a long 

time, and numerous companies, both large and small, have entered 

bankruptcy in the past. So market participants should have been 

well aware of the difficulties large financial firms would have faced 

if they failed. Given this knowledge, as firms grew they should 

have faced increasingly higher costs of capital because of the increase in the cost of potential bankruptcy risk. By imposing higher 

capital costs on large companies, the market would have placed a 

limit on the size of financial firms below the ‘‘too big to fail’’ threshold. 

Instead, it appears as if these large financial firms faced lower 

costs for both debt and equity than smaller financial firms. This allowed these firms to borrow enormous sums of money which they 

then used to purchase a variety of increasingly risky assets, and 

an upward cycle of growth, access to cheaper capital allowed these 

firms to grow even larger and break the ‘‘too big to fail’’ barrier. 

In a well functioning market, this should not have occurred. 


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Another aspect of the financial crisis that I find surprising is 

that while the market was sending clear signals that the residential mortgage-backed securities were risky, traders purchasing 

these assets seemed to simply ignore these signals. Basic financial 

theory teaches us that in order to earn an above-market return, 

one needs to purchase an asset with above-average risk. This is 

simply a formulization of the age-old adage that economists often 

use, ‘‘there is no such thing as a free lunch,’’ which in turn is the 

formulation of something mothers tell their children, ‘‘if something 

seems to be too good to be true, it is.’’ 

Unfortunately, participants in mortgage-backed security markets 

ignored what they were taught in econ 101 and what their mothers 

warned them about. Since these securities were earning an abovemarket return based on the level of perceived risk, people who 

were purchasing them should have realized that the historic returns were not supportable despite what they were being told by 

credit rating agencies. Over time, people learned that these assets 

were quite risky. The efficient market hypothesis worked vigorously and many of these assets are now worth much less than what 

was paid for them. 

In addition, managers seemed to have done an extremely poor 

job assessing the riskiness of the assets they purchased. Yet, few 

managers have been penalized for their poor performance. These financial companies were essentially purchasing boxes filled with 

residential mortgages. These boxes were stamped on the cover by 

one of the rating agencies. Managers then chose a combination of 

boxes to buy, depending on the overall risk they wanted to achieve. 

They threw these boxes in the corner and just waited to cash dividend payments produced by these boxes to arrive. It does not appear that they ever opened any boxes to check to see whether what 

was stamped on the cover was an accurate reflection of what was 

inside. Additionally, it does not seem that they ever tried to assess 

the covariance between boxes which is key for understanding the 

amount of risk faced by their firms. 

In other sectors, these managers would be out of a job. In the financial sector, they seem to still be working. This is hard to understand. 

This all leads me to conclude that the financial sector is simply 

not a well functioning, competitive market, and I am trying to understand why. 

One of the things I think we need to consider is that part of the 

problem is that the Government has long backed up creditors and 

insured them at 100 cents on the dollar. This has then led creditors 

to be willing to lend money to these financial institutions at a 

below-market rate. 

[The prepared statement of Dr. Troske follows:] 


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Chair WARREN. Thank you, Dr. Troske. 

Superintendent Neiman. 

STATEMENT OF RICHARD H. NEIMAN, MEMBER, 

CONGRESSIONAL OVERSIGHT PANEL 

Mr. NEIMAN. Thank you. 

Mr. Secretary, thank you for being here again to speak with the 

panel and to the public about important issues impacting financial 

stability and economic recovery. 

It has been over a year since our first hearing with you in April 

’09, so it is perhaps fitting to briefly take stock of where we stand 

in comparison to that period in history. 

First, it goes without saying that progress has been made in restoring financial stability. Although difficult challenges remain, the 

crisis levels of last year have receded and capital markets are beginning to function more normally. 

Second, a significant amount of TARP funds have been successfully repaid. This is an impressive accomplishment, as many banks 

have been able to privately raise capital and increase earnings in 

a market that is still constrained by recession. 

Finally, many of the causes of the financial crisis that put American taxpayers on the hook in the first place are being addressed 

in Congress as we speak. 

However, in other areas, needed change has not come as quickly 

as desired over the past year. And unfortunately, these are some 

of the very areas where Americans are hit the hardest. I may now 

be the panel’s virtual broken record on foreclosure prevention, but 

it is critical that families at risk of losing their homes have options 

that work. I am particularly concerned with yesterday’s Treasury 

HAMP report indicating that there are now far more families 

whose HAMP trial modifications have been canceled than there are 

families whose trial modifications have been converted to long 

term. 

Further, I think we all agree that small business lending is key 

to entrepreneurship and job creation. Yet, we continue to hear that 

viable small businesses are unable to access the credit they need. 

This was a recurrent theme from witnesses in our recent hearing 

in Phoenix. I am encouraged that the House recently approved the 

creation of the administration’s proposed small business lending 

fund. The fund would provide capital to the community and regional banks that are at the heart of small business lending. I 

would like to explore small business credit access and other lending 

issues with you this morning. 

Finally, with the financial reform work near completion, the 

United States finds itself in a unique and, some critics say, precarious position. Our country is doing our part in setting an example 

as a world financial leader. But as you are more aware than anyone, there are challenges we face within the global community between balancing our role as a leader of financial reform with the 

future of our international competitiveness. Time permitting, I 

would like to discuss this challenge with you so the public can 

more fully gain your perspective on moving our Nation toward reform while at the same time strengthening our position in a global 

economy. 


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I look forward to your views. 

[The prepared statement of Mr. Neiman follows:] 


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Chair WARREN. Thank you, Superintendent Neiman. 

Secretary Geithner, I would like to recognize you for five minutes. Of course, your written statement will be part of the record. 

We will try to hold it to five minutes so there is plenty of time for 

our questions and answers. Secretary Geithner. 

STATEMENT OF TIMOTHY F. GEITHNER, SECRETARY, 

U.S. DEPARTMENT OF THE TREASURY 

Secretary GEITHNER. Thank you, Chair Warren and members of 

the panel. A pleasure to be back up here again to review progress 

and our challenges ahead. 

You know, as you know in the fall of 2008, as we confronted the 

worst financial crisis this country has seen in more than 70 years, 

Congress and the previous administration mobilized an extraordinary financial response. Their actions started the process of stabilizing a financial system that was on the verge of collapse, and 

when President Obama came into office, he took the necessary 

steps to start to finish that job, to start to save the economy from 

what could have been a second Great Depression. 

Now, last December, I outlined for this panel an exit strategy for 

the Government’s emergency programs. This morning I just want 

to update you briefly on the impact those programs have had on 

our recovery, on the progress we have made in shutting them 

down, and their ultimate cost. 

First, because of the actions we took to put out the financial fire, 

alongside actions of the Federal Reserve and the Recovery Act, the 

economy is growing again, exports are rising, manufacturing output is on the rebound, businesses are investing, and so far this 

year, the economy has created half a million jobs in the private sector. 

Because of our actions, the financial system is in a much stronger position, and because of that, the cost of credit for homeowners, 

for consumers, for businesses has fallen significantly. Rates for conventional mortgages and auto loans, for example, are at historic 

lows. By acting quickly and with overwhelming force, we were able 

to avoid a much deeper recession, a much more costly recession. 

Second, we are now in the process of ending our emergency programs and recouping our investments. As you know, we have shut 

down most of the programs that characterized that initial phase of 

the emergency response, the capital purchase program, Treasury’s 

emergency guarantee for money markets, and the Federal Reserve 

has wound down the vast majority of its special lending programs. 

All those programs are on track to generate a significant profit for 

the taxpayer. 

We are making significant progress getting the taxpayers’ money 

back. To date, more than half of all the money disbursed through 

the TARP has been repaid. TARP investments have generated $24 

billion in additional revenue for taxpayers. When President Obama 

took office, nearly $240 billion of TARP funds had been invested by 

the previous administration into our Nation’s banking system. 

Today we have recovered three-quarters of that money, and we are 

making progress getting out of AIG and out of GM and Chrysler. 


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Third, as many of you have pointed out, the expected overall cost 

of TARP continues to fall. Last August, we projected potential 

losses at $340 billion. Today that estimate is down to $105 billion. 

We view that as a conservative estimate. We expect it to fall further. And as you know, the President has proposed a financial crisis responsibility fee to make sure that the Nation’s largest institutions that benefited most from these programs bear the cost of any 

ultimate losses on this program. That way we will be able to say 

to the American people they did not have to pay a penny of their 

hard-earned dollars to cover the losses that we may still face in 

TARP. 

We are on track to shut this program down as scheduled, and we 

expect to do so without having used hundreds of billions of dollars 

in authority that Congress gave us initially. To say it differently, 

we are going to return hundreds of billions of dollars of authority 

unused to the Congress to devote to reducing our future deficits 

and meeting the long-term needs of the country. 

Now, as you said, we all look forward to the day when these programs are history. It is important to recognize, though, they did 

what they were supposed to do. There is no job growth without economic growth, no economic growth without access to credit, no access to credit without a stable, functioning financial system. And 

our emergency programs played an essential role in starting that 

process of recovery and repair. 

Now, the damage caused by this crisis is still affecting the lives 

of millions of American families and thousands of businesses across 

the country, those struggling to find a job still, to make a mortgage 

payment, finance their retirement or their kids’ education, or the 

small business owner who still cannot find access to credit on affordable terms. 

And that is why in these final months, we will commit to use 

TARP authority—continue to use that authority to promote and 

maintain stability in the housing market and to improve access to 

credit for families and small businesses. That is why we are working with Congress and I think are quite close to getting Congress 

to adopt a new small business lending facility to help meet the 

needs of small business on the credit side, and that is why, of 

course, we are urging the Congress to act quickly to enact financial 

reform. 

We are not prepared to leave future generations of Americans 

vulnerable to the devastating effects of the financial crisis, and 

they should never again have to be asked to bail out a financial 

system in crisis. 

The House and the Senate are now very close—I am wrapping 

up—very close to enacting the strongest set of reforms we have 

considered as a country since the Great Depression. I would be 

happy to talk about those in more detail, but it is now time to provide the clarity and certainty about what the new rules of the road 

will be. Doing so will help recovery, help strengthen growth, help 

make sure that this financial system does a better job in the future 

of meeting the needs of Main Street businesses and families, and 

it will help restore confidence that our financial system will be a 

source of stability, not instability, for the U.S. economy and the 

global economy in the future. 


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You began with excellent questions. I will be happy to spend 

some time with you walking through the challenges ahead. 

[The prepared statement of Secretary Geithner follows:] 


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Chair WARREN. Thank you very much, Mr. Secretary. 

I think your point about the accomplishments of TARP are quite 

significant and your emphasis on the importance of a stable, functional financial system is what I would like to talk about. We have, 

obviously, made enormous progress in that direction, but part of 

oversight is looking where the problems still lie. I do not have to 

remind you that in just over three months, Treasury will no longer 

be able to initiate or redesign programs under TARP. What we do 

not do now we cannot do in the future. So we need to make sure 

that we have a good assessment of the problems that lie ahead and 

whether our proposed solutions are working. 

So I wanted to start with small banks. This panel has written 

about the coming troubles in commercial real estate. About half of 

the 1.4 trillion in commercial real estate loans held by banks will 

be underwater by the end of this year, which will make refinancing 

almost impossible for tens of billions of dollars of loans. About 

3,000 of the 8,000 intermediate and small banks have lending portfolios that are heavily concentrated in commercial real estate. We 

estimate that banks could be facing $200 billion to $300 billion in 

losses on these loans. 

So, on the current course, that means that hundreds, or even 

thousands, more small banks could capsize. What is Treasury doing 

now to prepare for these coming problems? Do we need to be reworking any of our current programs, Mr. Secretary? 

Secretary GEITHNER. Excellent question. And you are right to 

emphasize, as I tried to do, that we are going to be living for a long 

time with the lasting effects of this crisis. The damage was extraordinary. It reached far and broad across the American economy, and 

if you were in the real estate business, if you were in parts of the 

country that have exceptionally high unemployment rates, if you 

ran your business on access to credit that got washed out in this 

basic crisis, it is still an enormously challenging environment. 

And as you are right to point out, the small banks too came into 

this crisis, many much more conservatively managed than their 

Wall Street competitors, but many of them got themselves in a position where they had exceptionally high, regrettably high, unacceptably high levels of exposure to commercial real estate, and they 

still face a very difficult process of adjustment ahead. 

We have a set of programs still in place. The fuse on those programs will last beyond the formal expiry of TARP because as TARP 

was designed, we still preserve the capacity to implement those 

programs after the formal expiry of TARP. 

My view is the most effective thing we can do for the credit problems still ahead in the economy and the challenges still facing 

small businesses, small banks, because of the pressures on small 

businesses, is for Congress to enact this set of credit programs for 

small businesses. 

The way these programs are designed—and it is worth spending 

a minute on this—they do two very important things. One is they 

provide a modest amount of additional resources to States across 

the country that have programs in place to help provide support to 

small banks and small businesses. But alongside that, we propose 

a new small business lending facility that small banks will be able 

to access by coming to apply for investments from the Government, 


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and the more they increase lending, the lower the rate they pay on 

those investments. 

Chair WARREN. Mr. Secretary, if I could just stop you there to 

emphasize a different part of the question. And I understand the 

reasons for supporting this when we talk about small business 

lending. 

But the question right now is that 3,000 of our 8,000 banks 

across the country have heavy concentrations in commercial real 

estate. As I read it, for example, the new initiatives on small business lending, that is money that is not designed to go into banks 

to help them repair broken balance sheets. It is money to go into 

the healthy banks, the ones presumably that do not face the serious problems associated with their commercial lending portfolios. 

So the question I want to ask and that I want to press on is 

when you talk about the stability of the American banking system, 

we have 3,000 banks at serious risk that may not survive. What 

is Treasury doing about that? Or is the answer we are going to let 

them go? 

Secretary GEITHNER. As you know, Chair Warren, I cannot associate myself with your basic numbers about the magnitude of problems. That is an issue where really the FDIC’s basic framework is 

probably the most reliable reference we have. I do not know what 

their numbers are, but—— 

Chair WARREN. I am sorry, Mr. Secretary. Just so we are all 

clear on this, the numbers about concentrations of commercial real 

estate come from the banks’ examiners. Those are not numbers we 

generated. They have been generated by those who examine their 

books on a quarterly basis. 

Secretary GEITHNER. I am agreeing with you about the challenges. I just did not want my agreement with you about the challenges—— 

Chair WARREN. Fair enough. 

Secretary GEITHNER [continuing]. To be associated with your 

numbers on the picture because that I want to rely on the supervisors to paint that picture. 

As you know, we have a very elaborate process, well designed 

across this country that our supervisors run with the FDIC for 

dealing with the challenges facing our Nation of 9,000 community 

banks and thrifts. That process was designed in the wake of a series of past crises. It is a very well designed process, in many ways 

the envy of the world, and that gives the Government the ability 

to help those banks manage through, but also for making sure that 

we can help facilitate the restructuring ahead for that system. 

Now, those banks who are under pressure have lots of options. 

They can go raise capital. They can shrink lending to bolster their 

balance sheet positions. And you are also right to point out that the 

programs we designed from the beginning for very important reasons are only available for banks that we believe would be viable 

as an approach. But these are very important programs because 

what they will help do is make sure the banks face less need to 

shrink their balance sheets and have more capacity to expand their 

lending to businesses. So they could be very helpful as a complement to the basic programs that the FDIC and the bank supervisors run. 


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Chair WARREN. So I am over and I am going to take this off my 

time on the next question, but I just want to make sure. What I 

am hearing you say is, no reason to change anything. We will stay 

steady on the same course. 

Secretary GEITHNER. Well, you know, I am a very careful person 

and a very pragmatic person, and I am open to any ideas for how 

to make sure we are using our authority appropriately to help the 

country still manage through the challenges ahead. 

But at this stage, I believe that this suite of programs we have 

in TARP, alongside the existing programs that the FDIC and the 

supervisors manage, with this new small business lending initiative the Congress is considering, is the best mix of solutions that 

we have found at the moment. 

Chair WARREN. Thank you, Mr. Secretary. 

Mr. McWatters. 

Mr. MCWATTERS. Thank you. 

I will start with an easy question, a softball over the plate. Does 

the Administration plan to ask Congress to extend TARP beyond 

October of 2010? 

Secretary GEITHNER. No. 

Mr. MCWATTERS. So TARP will be dead on October 3rd, 2010. 

Secretary GEITHNER. This hearing should be a eulogy for TARP. 

Mr. MCWATTERS. Yes. Fair enough. Fair enough. 

Secretary GEITHNER. As I said many times, we are working very 

hard to put this program to rest, put it out of its misery. It is not 

going to solve all the problems facing the country. It was not designed to. We are not going to use it that way. We use it very carefully, but it has done the essential thing it was designed to do and 

therefore our expectation is it will be allowed to expire—— 

Mr. MCWATTERS. Off to the sunset. Right? Okay. 

Secretary GEITHNER. Mr. McWatters, can I just say—you said 

one thing in your opening statement I just want to correct. You referred to a June 11th press release where you said we implied that 

the overall program would be profitable. 

Mr. MCWATTERS. Yes. 

Secretary GEITHNER. I would never have done that. In fact, in 

that press release, we were very explicit that the latest cost estimates were in the $100 billion range. I think those are a little 

high, frankly. But we have been very careful. 

Now, for the bank piece of the program—you know, for many 

Americans, the program was defined by the really incredible act of 

the Government of the United States putting capital in banks that 

represented three-quarters of our Nation’s banking system. That 

was a focus of most of the deep public outrage and anger—that this 

country got itself in the position where, to protect the economy, we 

had to put money in the institutions that played such an important 

role in causing the crisis. It is very important for Americans to understand these were investments. They came with dividends, and 

on every estimate I have seen of the bank piece of these programs, 

they will return a positive investment for the American taxpayer. 

But every time we say that, I always make clear to say—and our 

numbers always show—that we still face a very substantial risk of 

losses on the range of other programs that Congress gave us the 

authority to enact, including the ones we inherited from the preVerDate Mar 15 2010 21:37 Dec 02, 2010 Jkt 062218 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 E:\HR\OC\B218.XXX B218

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vious administration, as well as the new commitments we have 

made. 

But I just want to make sure—I would never make that mistake 

and will never make that mistake. We always make sure that we 

tell people that we are still exposed to a very substantial risk of 

loss on the programs we inherited—— 

Mr. MCWATTERS. Right. 

Secretary GEITHNER [continuing]. And on some of the things we 

have done like in housing. 

Mr. MCWATTERS. But the metrics were sort of curious, the $194 

billion versus $190 billion. I mean, to a lot of people, it looked like 

you were trying to say there was a $4 billion profit there when, at 

the end of the day, there is really a $105 billion loss according to 

your own numbers. 

Secretary GEITHNER. One of the necessary, very important things 

about the way we in the United States Treasury have done these 

programs is we put out regular estimates, including by independent analysts, of the potential cost of these programs. It is very 

hard to find any country around the world that, in the wake of this 

crisis, has explicitly identified and provided regular, independent 

estimates of ultimate cost to the taxpayer. And I am very committed to that and we will keep doing that. People will come to 

their own judgments about ultimately what it will cost. All we can 

say is—— 

Mr. MCWATTERS. Sure, and the CBO does that and OMB does 

that also. 

Secretary GEITHNER. And they will change. You know, life is uncertain. But these programs will cost a fraction of what the critics 

feared and what the architects of the program thought was likely, 

a very small fraction. And the best way to measure this is to look 

at these projected costs relative to, for example, the S&L crisis in 

the 1990s, a much more modest crisis, much more simple to solve, 

still devastating for the communities affected, but dramatically 

higher costs from a much smaller crisis. But anyway, these are 

things that people are going to be able to look at independently 

over history. 

Mr. MCWATTERS. But at the end of the day, $105 billion is a lot 

of money. 

Secretary GEITHNER. Absolutely, and that is why we are working 

so hard to make sure we sure we bring those costs down and we 

are doing everything we can to minimize our risk of exposure to future losses. 

Mr. MCWATTERS. Well, let me ask you this. Is Treasury contemplating the allocation of any TARP funds to any new programs before October 3rd? 

Secretary GEITHNER. No. As I said in response to Chair Warren’s 

question, at this stage we are not contemplating any new programs 

using this authority. Again, we have got an obligation of care and 

prudence in this. We are very reluctant to do things unless we 

think there is a very, very high return on the taxpayers’ investment, and we think this is the set of programs today that strikes 

that balance. 

Mr. MCWATTERS. How about additional TARP funds to any existing TARP programs? 


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Secretary GEITHNER. No. We have no plans of adding to the current estimates we have put out of these programs. 

Mr. MCWATTERS. Okay. 

Secretary GEITHNER. First of all, for perspective, most Americans think we went in and spent $700 billion, and we are never going 

to see it again. In fact, we actually have put out about half of that. 

We have got more than half of that back already, and we have substantially reduced the estimates we started with about how much 

we would ultimately commit to these programs. 

Mr. MCWATTERS. Okay. My time is up. 

Chair WARREN. Mr. Silvers. 

Mr. SILVERS. Mr. Secretary, I hope I conveyed in my opening remarks my sense that the analysis you just went through is absolutely correct, and I think you and your team are to be commended 

for getting where we have gotten. 

With that intro, I want to shift to the question of the interaction 

of TARP with the larger economy. I asked our staff to give me an 

updated list of the metrics of lending. It comports with your written testimony that we are continuing to see declines in loan levels 

pretty much across all the different ways in which they are measured. As our chair noted, we think there are some deficiencies in 

how much data we are collecting. We would love to see you all collect more. 

My question to you is this. Given that data at a time when I 

think the Administration’s view is that we are in a recovery mode, 

the economy is growing, it appears as though the private credit 

system is acting as a lag on the growth of the economy. That would 

appear to be not what we were trying to get out of TARP. Can you 

give an analysis of that and what steps you think need to be taken 

to address it? 

Secretary GEITHNER. This is a very complicated question, and 

you are right. It is the heart of any evaluation of the effectiveness 

of any financial strategy like this. 

But I have a somewhat different view, which is that I think that 

if you look at most measures we can point to of the cost of credit, 

of overall financial conditions, they do not suggest that the financial system today is a source of weakness for the overall economy. 

In fact, I would say the opposite. There is not a chance that this 

economy would have started to grow again in the second quarter 

of last year. There is not a chance we would have had this level 

of economic growth and this early a return to an economy still 

starting to create jobs again, adding hours, incomes growing again, 

without the dramatic actions we took, however unpopular, to bring 

down the cost of credit and stabilize the system. Now, this is not 

something that you can know for certain. 

It is absolutely the case that in the housing market, in the commercial real estate market, in the context of small businesses that 

were unlucky in their bank or in parts of the country that are still 

at the epicenter of the housing crisis or have high unemployment 

rates, that credit is still very hard to get. But I do not think on 

the available evidence today you can say that the financial sector 

itself is operating as a significant drag on the recovery. 

One of the reasons why we decided—I am going to finish quite 

quickly. Just give me one second. 


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Mr. SILVERS. Yes. 

Secretary GEITHNER. One of the reasons we decided to act so 

forcefully to recapitalize the banking system early on in the crisis 

was we wanted to make sure the system was going to be able to 

finance recovery, finance growth, and would not operate as a drag 

on growth. And I think we are in a very good position to achieve 

that outcome, again acknowledging that there is still a lot of damage out there that is going to take some time—— 

Mr. SILVERS. But, Mr. Secretary, I think maybe you are not confronting what I was asking quite head on. I do not disagree with 

you that it could have been much worse, that the situation as it 

was in 2008 and early 2009 is significantly worse than today. My 

concern is that the situation today is not what it should be at this 

moment in an economic recovery in terms of the behavior of the 

private credit system, not so much in housing. But it is not clear 

we really have a private credit system in housing at the moment 

with the level of Government support that remains there on the 

Fed’s side, but more on the business side, which is where the job 

growth needs to come from. And that brings us back to what I said 

in my opening statement about a chronic problem replacing an 

acute one. 

I wondered if you could focus more specifically on that question. 

Secretary GEITHNER. Again, let me try a slightly different approach. 

The best measure we have about whether the financial system 

is a constraint on growth is what is the price of a loan, credit. So 

look at the cost of municipal borrowing, mortgages, business credit 

in almost any sector. They are not just lower than they were at the 

peak of the crisis. They are very low. 

Another example on this question is if you look at the balance 

sheets, how much cash businesses have on hand across the American economy—again, the averages mask lots of variation, but the 

business sector as a whole has very, very strong balance sheets and 

is sitting on a lot of cash. 

Now, I completely agree with you about the basic risk, which is 

we do not want to have a recovery that is constrained by credit 

that is too tight. And credit is still too tight in significant parts of 

the American economy. 

But on those two measures, I would say I do not believe that we 

face a risk of a chronic problem. I would not use that word. But 

we are going to keep making sure that we are doing things to make 

sure this economy is growing again as strong as it can and that we 

are improving the process of repair that has started across the system. 

Mr. SILVERS. I think most economists would say that the fact 

that businesses are sitting on a lot of cash is not necessarily a good 

thing in relation to our recovery. What is your understanding—— 

Secretary GEITHNER. That I would agree with. But again, I was 

saying as a measure of financial headwinds, it is a good measure. 

Mr. Silvers, I would say that, again, this economy—we still have, 

I think, roughly eight million Americans still out of work. People 

are still living with a basic level of financial insecurity that they 

have not experienced in decades. So you are absolutely right about 


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that, and we are still at the early stage of fixing what was broken 

in this economy. That is going to take more time. 

Mr. SILVERS. The Chair was kind enough to give each of us the 

same time she took. So I am going to use it. 

What I am pushing on is that if you look at those reserves of 

cash, although you may have data I do not have, I believe that they 

are weighted toward those companies that have access to public 

credit markets where the recovery has been more dramatic. If that 

is not so, I would appreciate hearing about that. Our anecdotal experience doing hearings and the like, and our reports, suggests that 

if you have to deal with the banks as your source of credit, you 

have got a much tougher situation as a business person and the 

fact that the price of credit—let us put it this way. I think the testimony we have heard from small business people is that the bank 

may post a rate at the window, but it is not available to them. The 

money is not available at that rate. And that feels like a serious 

problem, does it not? 

Secretary GEITHNER. Well, I agree with you it is a serious problem. I totally agree. That is why we have asked Congress to enact 

a set of legislation that would help mitigate that problem. So I am 

not sure that we disagree. 

I would just say that on your basic question about whether on 

the available evidence you have a financial system today that is a 

source of restraint on growth, I do not believe that would be a fair 

characterization of the overall average of the American economy. 

Absolutely, in parts of the country, in particular sectors, that is the 

case. And it would be surprising if it were not the case, given the 

extent of this. 

Chair WARREN. Thank you, Mr. Secretary. 

Dr. Troske. 

Dr. TROSKE. Thank you. 

So I guess I would like to start off by getting your thoughts on 

or have you respond to concerns expressed by many that for large 

financial institutions and their creditors, the Federal Government 

has essentially privatized profits but socialized the losses. I think 

that seems to be one of the main frustrations that a lot of people 

feel about the TARP program. So maybe you could give me your 

thoughts on that. 

Secretary GEITHNER. I thought your opening statement was very 

interesting. I listened very carefully and it is worth going back to 

let me just answer a little bit of what I think about why we got 

into this mess. 

Dr. TROSKE. Okay. 

Secretary GEITHNER. You are absolutely right. Market discipline 

failed. The market failed to constrain risk-taking by financial institutions. That had two causes. 

One was a classic moral hazard risk, the expectation that the 

Government would come in and insulate private creditors from 

losses. That was acute and conspicuous in the case of the GSEs. 

But the crisis had another cause and it was much more powerful 

in the moment, and that was that the market, financial markets 

had financed a huge growth in leverage in a set of institutions that 

were allowed to operate outside the constraints of regulation on 

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ment banks and a vast range of nonbank financial companies, some 

of whom called themselves thrifts, those institutions were able to 

operate outside the set of constraints and in overwhelming cases 

without any history or expectation of government support. 

Now, that is not something you can attribute to moral hazard. 

That was just a classic lack of judgment by people financing these 

firms that we might face a recession with acute losses in housing 

prices. 

But the key thing is, do we have a set of reforms now in prospect 

that will address that risk? And what these reform bills do—and 

this is fundamentally important—is to make sure that those institutions that essentially operate like banks, whatever you call them, 

and take risks as banks are important to the functioning of the 

economy. We will constrain their risk-taking. Whether you call 

them AIG or you call them Goldman Sachs or you call them J.P. 

Morgan Chase, we will constrain the leverage and risk they can 

take on. And this is very important. And if they mess up in the future, if they end up getting themselves in a position where they 

cannot survive on their own, then we will step in and dismember 

them safely, minimize risk of loss to the taxpayer, make sure that 

they can be broken up by a quasi-bankruptcy type mechanism. 

That is what this reform bill does. 

The absence of that authority to constrain risk-taking in the crisis prevention context and the absence of tools to manage their 

unwinding is what forced us to take those exceptionally offensive 

measures in the fall of 2008 and the first half of 2009 to put out 

the financial fire. 

Dr. TROSKE. Well, I guess the example of Long-Term Capital 

Management would be one of a financial firm and not a bank 

where the Government did come in and backstop the firm. Now, 

they did not provide taxpayer money, but they did arrange a rescue 

of that firm which perhaps would lead one to think that that is 

what the Government was going to do for these other firms as well, 

that rescue became an expected norm in this. 

There are entities out there, presumably credit holders and equity holders, who are supposed to be regulating these firms. The 

creditors who do not experience the upside gain are the ones that 

have the most to lose and should have been the ones doing it. It 

is not a large stretch to think that they were failing in that role 

because they felt that they were going to be guaranteed a return 

regardless of what happens. 

Secretary GEITHNER. I think you are right that all financial systems have this expectation, this risk of moral hazard, this expectation that in the extreme event it is possible the government would 

act. And that is the job of oversight and policy and government, to 

make sure that because of that risk, you have tough, well designed 

constraints on leverage that are imposed and enforced across the 

system ahead of the crisis. So none of us run a system and no country runs a system on the expectation that market discipline alone 

is adequate to constrain risk-taking. All countries constrain leverage through capital requirements. Some do better than others. We 

did it quite well in some parts of the system, but did it very poorly 

or inadequately or not at all in large parts of our system, and that 

is something we are going to change. 


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Dr. TROSKE. And you have mentioned this, the systemic risk regulator or whatever you want to call it. I mean, under the current 

system there was the President’s Working Group on Financial Markets which was supposed to be assessing overall systemic risks to 

the economy. At least, that is my understanding. You would certainly know more about it than me. 

So what is the difference between what we are setting up going 

forward and what we have now—because it is the same players as 

far as I can tell—many of the same players. What powers will they 

have that are different than what they have currently? 

Secretary GEITHNER. Excellent question, and both you and Mr. 

McWatters have made the basic point. I will tell you what I believe. 

We are not going to design a system that depends on the foresight and wisdom of officials sitting in Washington in those agencies to come in and preempt—act preemptively to diffuse all future 

sources of risk and crises. We hope that will happen in the future. 

Maybe it will happen, but that is not the premise on which we are 

reforming the system. 

What we are doing is to make sure there are clear, public, enforceable constraints on the types of risks that can imperil a system through constraints on leverage and capital and liquidity. We 

think that is the most realistic way to make sure that the system 

runs with much greater cushions against future sources of loss, 

shocks, uncertainty, stress. We will not know where those are 

going to come from. 

And I agree very much with the premise of both your questions 

that if we design the system to work only if regulators are perfectly 

wise and brave and preemptive, then we will be consigned to a fate 

of future crises like this, and that is not the reforms we are supporting. And I agree with your skepticism about that approach. 

Dr. TROSKE. One more. I guess ultimately if the Government is 

faced with another crisis in which several institutions are failing 

simultaneously, is there anything that will prevent them from enacting a TARP II in the situation in which there is a Bear Stearns 

and an AIG and a Lehman, and everybody is failing at approximately the same time? Nothing that I have seen would change anything from what happened in the past. 

Secretary GEITHNER. Excellent question. That was the system we 

had, and that is what put the Government of the United States in 

the outrageous position of having no choices but to come in and 

commit an extraordinary amount of resources to put out that financial fire. That was the necessary, unavoidable situation, given the 

system we had. 

But the reforms that are on the verge of enactment here really 

do help fix that problem because again, apart from the crisis prevention authority that they give the Government, which the Government did not have—it did not have the ability to constrain risktaking across vast swaths of the American financial system because 

they did not call themselves banks, and we let them operate like 

banks. It fixes that problem, but it also—and this is very important—makes sure that if, in the end, an individual firm gets itself 

in the mess like so many did in this crisis, we will be able to let 

them fail, ensure they fail, dismember them safely, wind them 


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down, not to give them the chance to survive again, operate again, 

but to put them out of their misery without the taxpayer being 

forced to absorb these losses or the businesses and families across 

the country left with all the collateral damage of their basic mistakes. 

These are not great metaphors. But what you want in a crisis is 

you want to have the ability to step in. There is fire in a firm or 

a set of firms because they were imprudent. You want to be able 

to ensure you can draw a line around that fire, prevent the fire 

from jumping the fire break and infecting and imperiling the stability of the rest of the system. And that is what this reform does. 

Chair WARREN. Mr. Secretary. 

Secretary GEITHNER. Thank you. 

Chair WARREN. Thank you. 

Superintendent Neiman. 

Mr. NEIMAN. Thank you. 

Mr. Secretary, I would like to start off with the HAMP program 

and foreclosure prevention. In the Treasury report issued just yesterday, trial modification cancelations nearly tripled from March to 

May. The number of families that have received permanent modifications under HAMP at 350,000 is now surpassed by the number 

that have been pushed out of the program, almost 430,000. It is 

deeply troubling that the homeowners who relied on and trusted 

this Government program may be left out in the cold. From the report, of those who were dropped out—the 150,000 in May alone— 

over 70 percent of those individuals have been making timely payments for 6 months or more. 

First, we need to really understand why these hundreds of thousands of modifications were canceled. And while the report issued 

yesterday cites several reasons, can you share with us the primary 

reason that people were dropped out and what assurances can we 

give them that they were appropriately considered? 

Secretary GEITHNER. The overwhelming reason is they were unable to prove income and therefore unable to demonstrate that they 

were eligible for the program. We made a conscious choice last 

summer in putting this program in place, which is that we would 

do everything we could to maximize the number of families who 

were potentially eligible for this program to get immediate cash 

flow assistance. Because of that strategy, we had roughly, at the 

peak, 1.2 million Americans benefit from temporary loan modifications that, as you know, substantially reduced their monthly payments. But we let them do that on stated income, knowing that we 

would have to go back and be able to demonstrate that they were 

truly eligible for that. 

Now, that inevitably put us in the position where we are today, 

which is that by erring on the side of speed, we put ourselves in 

the position where we were inevitably vulnerable to the possibility 

that many of those homeowners who thought they were eligible, 

said they were eligible, were unable to prove income. Therefore, we 

are in a position today where we are, as you said, canceling some 

of those modifications. 

Now, more than two-thirds, I think, of those people who, as you 

said, are in that category of canceled modifications are benefitting 

from other modification programs that their banks offer that we 


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are not supporting. So that helps temper a little bit the consequences of not being eligible for this program. But again, we 

have a careful balance to strike, which is to make sure that we are 

devoting these scarce resources to people that are able to prove 

they are eligible for the benefit. 

Mr. NEIMAN. So what kind of verifiability, audit compliance can 

we provide to document this? We hear anecdotal information about 

documents being lost, and servicer error in verifying income and 

processing other documentation. How can we assure and provide 

that level of comfort that servicers are acting properly? 

Secretary GEITHNER. I think it is very important to say that 

servicers have done a terrible job of making sure that they are 

doing everything they can to meet the needs of their customers who 

are facing the possibility of losing their home and the most important part of their financial security. They still have some distance 

to go to try to make up for that series of basic—how should I say 

it—mistakes, inadequacies in performance. 

So what we have tried to do is simplify and reduce the documentation burdens. And we have put enormous pressure on 

servicers by putting out very detailed public metrics of performance 

so that people can judge for themselves who is doing a good job on 

the service side of meeting the needs of their customers and who 

is lagging behind in that case, and we will continue to put as much 

pressure as we can on them to improve the quality of service they 

are giving their customers. 

Mr. NEIMAN. Now, you made reference to the fact that a majority 

of those who have dropped out of the program—whose trial modifications were canceled—were offered non-HAMP modifications, 

these proprietary modifications by the servicer. But is it not true 

that the true test will be whether the borrower is better off? Until 

we see the statistics on those non-HAMP modifications to—see if 

there has been an increase in the cost or the monthly payment— 

will we know whether those are truly sustainable? 

Secretary GEITHNER. I completely agree with you, and that is a 

very hard thing to measure, but I completely agree with you. 

I think I would say the following. Unlike the situation two years 

ago before the Government put out this basic standard for modifications, most of the private modifications out there did not meet 

that test. They left the borrower with as much debt, if not more 

debt than they had coming in. 

But since then—again, the general impression I have is that the 

Government standard has improved and raised the standard of 

those private mod programs, and that helps, a little bit, mitigate 

that risk. But you are right about the basic—— 

Mr. NEIMAN. Do you expect that the public will be seeing any 

data? Has the Treasury been requesting, even if on a voluntary 

basis, some of the key elements of those non-HAMP modifications? 

Secretary GEITHNER. We are continuing to look for ways to do 

that and would be happy to try to be responsive about explaining 

what we think is achievable in that area. 

Mr. NEIMAN. You know, another surprise that we keep hearing 

from borrowers who are now being presented who have been 

dropped from the program is that they are responsible now in some 

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cipal and interest that was foregone during that trial modification. 

And even some borrowers are being assessed late payments for the 

six, seven, or eight months they were in the program. 

Secretary GEITHNER. Well, as I said, I do not believe that any of 

the banks that are at the center of this problem are doing an adequate job now of making up for the mistakes they made and helping their customers get through this problem. And we are going to 

continue to, as I said, put enormous pressure on them to try to 

make sure they are doing a better job day by day in meeting those 

basic obligations to their customers. 

Mr. NEIMAN. One provision that I think would be extremely helpful—I have been calling for this for a while—is the creation of a 

homeowners advocate within the Treasury. Senator Franken has 

proposed an amendment that has passed the Senate, and I would 

hope with the Administration’s support, we would see a provision 

like that and seek your support that it would be adopted. 

Secretary GEITHNER. I am happy to consider that. 

We are fortunate to have some very talented people who know 

a lot about housing involved in essentially designing these programs. We do so alongside the excellent people at HUD led by 

Shaun Donovan, and we have a series of hotlines, appeal process 

to try to—again, we are moving in that direction. But I would be 

happy to consider that. 

Mr. NEIMAN. Having an appeal process that people know they 

can reach out to Treasury would be a critically important part in 

my opinion. 

Thank you very much. 

Chair WARREN. Thank you. 

So, Mr. Secretary, I want to go back to this question about stable, functional financial systems. We talked about the small banks, 

the 3,000 out of 8,000 that have these potentially dangerous concentrations in commercial real estate. 

I want to look at the top end. Six of the 19 stress-tested banks 

hold commercial real estate loans that exceed 100 percent of their 

tier one capital. As you know, the stress tests that were performed 

in February of 2009 calculated possible losses only through December of 2010, but the commercial real estate losses, because of the 

way they are set up, are likely to be much larger in 2011, 2012, 

and on into 2013. 

How can you be confident about the stability of these financial 

institutions without re-running the stress tests to account for the 

coming troubles in commercial real estate lending? 

Secretary GEITHNER. As I said, these loans and losses and assets 

are going to be an ongoing source of challenge to these institutions, 

absolutely. But I think overall it is fair to say, although this is 

really a question for the supervisors, that actual losses on the 

books of the institutions that were subject to the stress test are 

coming in significantly under those estimates on average overall. 

And that is really the ultimate test of this stuff. 

We are able to say today—but again, this is a question we look 

at all the time on an ongoing basis—that based on what we have 

seen so far, the losses are doing better than projected and therefore 

the capital positions of these institutions are even better than we 

thought we were achieving at the time of the stress test. 


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Chair WARREN. But at the time of the stress tests, we only accounted for losses through 2010, and we know that the losses on 

commercial real estate, because they were on five-year resets unlike the subprime residential mortgages, are coming up for major 

resets in 2011, 2012, and 2013. That is outside the range of the 

original stress test. 

So I am glad that you think the numbers look better that you 

had anticipated for 2010—— 

Secretary GEITHNER. I would say even projected losses—— 

Chair WARREN. Does this mean you are running a mini-stress 

test? 

Secretary GEITHNER. Well, again, what our supervisors have 

done—and they did this, again, on a plan that we designed—is they 

have put in place a much higher level of disclosure on the exposures the U.S. banking system retains, subjected them to much 

more rigorous estimates of potential losses in an extreme scenario 

than was true for any of the countries that went into this crisis. 

And you are seeing now countries move to adopt that basic framework. And the virtue of this approach was we pushed a lot more 

capital into the financial system at an early stage. And again, the 

best way to measure this is to look at how the market is judging 

the adequacy of capital levels here relative to potential risks. I 

think that, again, relative to expectations, is better than we would 

have expected. There is still a lot of challenge ahead though. 

Chair WARREN. I have a feeling I am going to hear the same answer, but let me just try it again with second liens. Big banks are 

still carrying second liens on their books at inflated values. Many 

analysts believe there should be a large portion of these loans 

should be written off. 

As of March 31st, 2010, the four largest banks held $444 billion 

in second mortgages and had total tier one capital of only $505 billion. 

Do you have any concerns about what this means? Now we are 

doing commercial real estate. Now we are moving on to second 

mortgages? 

Secretary GEITHNER. Well, of course, banks have on their balance 

sheet still—even though they have produced assets to some extent, 

they still have a lot of exposure to the challenges ahead facing the 

American economy. The question is how much capital are they 

holding against those potential losses? 

Again, in the judgment of our supervisors—and I think you can 

see this judgment validated by the financial markets today, although as many of you pointed out, they are an imperfect measure 

of risk and loss. The general sense is that projected losses are less 

than they were expected, and therefore more capital is now held 

against those losses than we thought would be the case back a year 

ago, and that is a good thing. 

Now, of course—— 

Chair WARREN. Let me try one more. Fannie and Freddie are 

pushing mortgages back to these large financial institutions because they say that the mortgages that were sold to Fannie and 

Freddie were not of the quality that they was represented, that 

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close the requested buy-backs, but Freddie alone requested another 

$5 billion in buy-backs at the end of March. 

So the first question is, does Treasury have a good estimate of 

what the total exposure is to our large financial institutions from 

the requests from Fannie and Freddie to buy back bad mortgages? 

Secretary GEITHNER. I do not know the potential scale of that 

again, but I think it is very unlikely to change this basic judgment 

that our supervisors have that the major banks of the country now 

hold a level of capital against potential risks that puts them in a 

much stronger position than we expected even a year ago when we 

included this process. And that goes to each of the things you 

pointed out, each of the sources of potential loss still ahead. 

Now, again, this is an uncertain world still. We want to be very 

conservative in making these assessments, as we were a year ago. 

And our supervisors will—and this is a great strength of our system—they continue on a regular basis—one of you say in your 

opening remarks that we do not contemplate stress on an ongoing 

basis, but that is absolutely not the case. A centerpiece of the basic 

reform design that we contemplate—and again, I hope this will be 

a global standard—is to say regularly—regular, quarterly—difficult, challenging, forward-looking assessments of potential losses 

at least for the major banks that dominate our financial systems. 

Chair WARREN. So are you saying that those are ongoing now or 

they will be ongoing if regulatory reform passes? 

Secretary GEITHNER. Both. 

Chair WARREN. Thank you, Mr. Secretary. 

Mr. McWatters. 

Mr. MCWATTERS. Thank you. 

Mr. Secretary, earlier you said there would be no new TARP programs, but with respect to existing TARP—— 

Secretary GEITHNER. I said right now, we do not contemplate 

putting in place new programs or adding resources beyond the 

amounts we initially identified. 

Mr. MCWATTERS. Okay. So that means there will be no more 

money going to AIG or GMAC. 

Secretary GEITHNER. Again, I will answer your question again. 

We do not anticipate at this stage putting more money into those 

existing programs or into those institutions beyond the levels that 

are out there that are subject to public knowledge now. 

Mr. MCWATTERS. And the same would apply for Chrysler and 

GM. 

Secretary GEITHNER. Yes. Again, let me tell you—let us do the 

other side of your question. We are now on a path to exit from 

those companies much more quickly at a much lower estimate of 

losses than any of us anticipated. We are starting that process. 

AIG—we are bringing down the risks very dramatically, we already 

have sold successfully significant parts of that company. We are 

going to continue to move as aggressively as we can to get the Government out of those investments, which we only took, of course, 

under extreme duress extremely reluctantly. We are making the 

same basic strategy in GM and Chrysler. Again, those are commitments we inherited. We are trying to reduce them as quickly as we 

can at as low a risk of loss to the taxpayers as we can. 


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Mr. MCWATTERS. If there was a double-dip recession and Goldman and Citi and Bank of America and the usual group of ‘‘too big 

to fail’’ institutions came to your office and said we are experiencing a liquidity crisis, would you advance them money under 

TARP until October 3rd? 

Secretary GEITHNER. I do not ever answer those kind of questions just because they are sort of unanswerable, but if financial 

reform is in place, then we will have the benefit of a very well designed quasi-bankruptcy process and a set of emergency measures 

to contain the risk of a panic that we did not have in place in the 

fall of 2008. And that would give us better choices at that stage. 

Mr. MCWATTERS. So assuming those are not in place and we 

have the last quarter of 2008 again—— 

Secretary GEITHNER. You are talking about in the 12 weeks remaining—— 

Mr. MCWATTERS. Yes. 

Secretary GEITHNER [continuing]. Of this program? 

Mr. MCWATTERS. Yes. 

Secretary GEITHNER. Well, again, our job and my responsibility 

is to make sure we are safeguarding the basic strength of the 

American financial system, but again, our system, because of the 

actions we took, is in a much stronger position still to manage 

through these challenges ahead than any of us expected, and I 

think that is a remarkable thing and a very important thing. And 

we are going to do everything we can to safeguard that. 

Mr. MCWATTERS. Okay. Let us say financial reform is in place. 

The same people come to you and say, you know, there is a systemic regulator. The systemic regulator was supposed to look into 

a crystal ball and see stuff and—— 

Secretary GEITHNER. Mr. McWatters, that is not what this reform does. And as I said—I will say it again—we are not designing 

a financial reform program that rests on the ability of supervisors 

to look into some early warning system and have perfect foresight 

and judgment and be able to come in and preemptively—we are not 

designing a system that requires that. We will do our best at that, 

but we have fundamentally different strategies to say that we are 

going to force the system to run with less leverage, less risk of 

funding, less exposure to catastrophic risk than was true before. 

And that is the best protection we have against systemic financial 

crises. 

Mr. MCWATTERS. Yes, but the problem with that is that AIG was 

not a mystery to people. Most people on Wall Street understood 

that AIG was writing trillions of dollars of credit default swaps. 

Most people understood that AIG was purchasing billions of dollars 

of residential mortgage-backed securities. The problem was, even 

though people recognized it, they did not recognize it as a risk. 

They did not look at that as risky behavior. 

Secretary GEITHNER. I do not agree with that. I think this crisis 

is littered with examples of people failing to foresee risks that end 

up causing catastrophic damage. 

The AIG failure is just a different—and it is a more simple failure. There was nobody responsible with the authority and the capacity to constrain risk-taking by that institution. There were, as 

you said, tens and tens of regulators across the United States and 


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across the country, but none of them were responsible for constraining the risks that AIG as a group took on, and that was an 

avoidable mistake, easy to avoid frankly. 

Mr. MCWATTERS. Yes. AIG had 400 regulators throughout the 

world. 

Secretary GEITHNER. A remarkable thing. 

Mr. MCWATTERS. But, I mean, you are saying if there is one 

more—there is a systemic regulator—— 

Secretary GEITHNER. You said something else in your remarks 

that is not quite not right. We are not adding new regulators. We 

are actually reducing the number of regulators in our system. All 

we are doing, frankly, is making sure that the people whose job it 

is to manage financial stability for the country have the authority 

to constrain risk-taking where those risks could cause catastrophic 

damage. That did not exist before this crisis. It is why we had the 

crisis, and that is not something we are prepared to live with in 

the future. 

And AIG is the perfect example but it is not the only example 

because you can look at Lehman or Bear Stearns or Merrill Lynch 

or a whole raft of non-bank financial companies who were taking 

substantial risks. The tragic feature of our system was nobody had 

the tools and responsibility for constraining those risks ahead of 

time. And when they messed up, we did not have the tools or the 

choices to be able to let those failures happen without catastrophic 

damage. 

Mr. MCWATTERS. But that assumes you know what the risks 

are—— 

Secretary GEITHNER. No, no. 

Mr. MCWATTERS [continuing]. That you can look into the future. 

Secretary GEITHNER. Again, the great virtue of capital-constraining leverage is to recognize the fact that we live in an inherently uncertain world. No one will know with confidence what the 

risk is or probability is of potential losses associated with some future recession. You do not know that. 

The only thing you can do—and this is a fundamentally conservative instinct—is to force these institutions to run with less risk 

against the unlikely but possible risk of another great recession. 

And that is an effective tool of constraining risks. Firms that run 

with less leverage in a crisis do much better than those that run 

with more leverage. That is an achievable object of reform. 

Mr. MCWATTERS. If you define a risk appropriately, and you enforce the rules appropriately, that is the only way. 

Secretary GEITHNER. Well, again, we think the basic lesson of 

this crisis is simple, an objectively measurable set of basic constraints on leverage. Banks should fund more conservatively. They 

should not be exposed to the possibility that overnight people 

would withdraw tens of billions of exposure and leave them with 

the choice of liquidating or doing massive liquidation and 

deleveraging that can put huge pressure on the rest of the system. 

So I mean, you should judge these things by the alternative. I 

am not aware of any credible argument that there is a more effective basic tool than constraints on leverage through capital requirements and liquidity funding as a safeguard. Now, they will not prevent all firms from failing, and we are going to run a system where 


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firms can still fail. That is an important part. It helps improve 

market discipline. But I do not know of any credible alternative 

and no other fundamental feature of financial oversight that does 

not begin with well designed, measurable, simple constraints on leverage. They will not prevent all crises. They will not prevent countries from taking too much risk, but they will protect the system 

from the kind of damage we saw in this crisis. 

Mr. MCWATTERS. Okay, thank you. My time is up. 

I will just close by saying I am not sure, with 400 regulators with 

volumes of regulations, that adding a few more regulations or another regulator is necessarily going to solve a problem which will 

come in the future from creative investment bankers and an investment community that will derive new types of instruments that, for 

example, 10 or 15 years ago we did not see. So I will leave it at 

that. 

Secretary GEITHNER. But, Chair Warren, let me just say maybe 

we agree more than you think. 

But again, the feature of our system was not that AIG was 

crawling with supervisors with the authority to constrain their 

risk-taking. That was absent not present in our system. Now, you 

are right. If it was present, then you are right. Then changing the 

deck chairs in the supervisory community would not be an effective 

response and we are not going to do that. That is not our proposal. 

It is a much more simple prescription which is to say institutions 

that take risk to play this important role of fundamentally banking 

in our system need to be subject to conservative constraints on leverage and risk-taking. AIG was not. We will make sure it is. 

Chair WARREN. Thank you, Mr. Secretary. 

Mr. Silvers. 

Mr. SILVERS. Well, I cannot resist continuing this line of discussion. 

Let me observe first, Mr. Secretary, that I think that your fundamental observations about this set of questions are absolutely correct. Our report on AIG showed two fundamental things. One was 

that the lines of business that led to the collapse of AIG were those 

that were unregulated despite the presence of the 400 regulators. 

The 400 regulator number is, in fact, just an indication of the fact 

that AIG was a global insurance company and there are insurance 

regulators in every country they operate in. 

The second thing that I think our report showed was that although I think that we as a panel may disagree with you, Mr. Secretary, about some aspects of what you did with the choices you 

had, it is very clear that the choice you did not have in your former 

role at the Federal Reserve Bank in New York—your predecessor 

at the Treasury, the Fed Board of Governors—the choice you did 

not have was to access a resolution authority that would have enabled you to pick and choose what to do with different creditors in 

a systemic crisis. 

So I just want to observe that I think your analysis of those two 

matters is spot on. 

Now, I want to take it a little further from there, though. We 

learned as a panel—and it is reflected in our report on AIG—how 

powerful certain aspects of AIG’s structure as a holding company, 

what a powerful force they exert on the choices available during 


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the crisis, in particular, the way in which the unregulated, 

unguaranteed subsidiaries were tied to the regulated guaranteed 

subsidiaries of AIG. That is, the derivatives arm and the insurance 

companies were tied together by credit rating considerations and 

by interlocking default terms in the various credit agreements in 

that big, complicated firm. 

That seems to me to be a powerful argument for making sure 

that in the future financial firms that have government guarantees 

behind them, insured deposits, insurance companies are not so tied 

up with very risky lines of business, derivatives, proprietary trading, hedge funds and the like, and thus is a powerful argument for 

two items currently being debated in the financial reform bill. 

The first is the Volcker Rule, the notion that we ought to basically say bank holding companies cannot do proprietary trading, 

cannot invest in hedge funds, cannot invest in private equity firms 

because it gives rise to this kind of problem. 

The second is section 716, the section that essentially requires 

that derivative dealers not be within bank holding companies or, 

as some have proposed, that they at least be a separate entity 

within bank holding companies. 

In the spirit of that analysis, I would like you to explain what 

the Treasury Department’s view is on those two issues today. 

Secretary GEITHNER. Excellent question. And as you know, the 

members of the Commerce Committee and the chairmen involved, 

including Chair Lincoln and Chairman Dodd, are carefully going 

through those provisions to try to figure out how to make sure we 

come to an appropriate balance. I am very confident, on the basis 

of our conversation with them, that they are going to come to the 

right place in this stuff. I think I would just highlight the following 

key objectives that are guiding our approach to this stuff. 

One, as you said, we want to make sure that institutions that 

own banks are not able to take risks, like through proprietary trading or in derivatives, if they use derivatives for proprietary trading, 

that could either imperil the stability of the bank or allow the firm 

to benefit from the access to the safety net that banks enjoy as a 

privilege and extend that benefit to those activities that we do not 

believe are central to the functions of banking. 

On the other hand, it is very important to point out that the 

basic business of banking requires banks having the ability to 

hedge risks, and a central part of banking is helping their customers hedge their risks, whatever those are. And we want to 

make sure that the bill ultimately preserves that ability for banks 

to hedge the risks they take on as banks and are able to help meet 

the needs of their customers in hedging their risks. 

As I said, I am very confident we are going to come to a good 

balance on these provisions, and this bill will do an exceptionally 

important thing of bringing comprehensive oversight and restraint 

to derivatives markets that still have enormous benefits to the 

economy as a whole but, as we saw in this crisis, present enormous 

risks and would still present enormous risks if we were unable to 

enact these reforms. 

Mr. SILVERS. Mr. Secretary, there are press reports that efforts 

are being made with respect to both measures I indicated to essentially weaken them through ‘‘de minimis’’ exceptions. And you 


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spoke for a moment about that issue in the area of section 716 in 

derivatives. 

Can you speak to the question of whether banks will be allowed, 

in the guise of a de minimis rule, to put meaningful amounts of 

capital into sponsored hedge funds and private equity funds. 

Secretary GEITHNER. For reasons you will understand, just out of 

deference to the legislative process, I am not going to comment on 

the details of those provisions. 

Mr. SILVERS. Oh, no. I am talking about Treasury’s view, not on 

what the members of the committee will do. 

Secretary GEITHNER. Still, I think we need to let this process 

work, and the members of the committee are doing a very difficult—they are facing a very difficult job still trying to find a set 

of measures that will command broad support. But again, I am 

very confident this bill will do the necessary thing of making sure 

that we are constraining risk-taking by these institutions, bringing 

derivatives markets under comprehensive oversight, and establishing the type of quasi-bankruptcy process for institutions that 

are so important. 

Mr. SILVERS. I would just observe—and my time has expired, but 

I would just observe that when you are talking about leveraged investments under a bank logo, that a de minimis exception could 

very easily blow up a capital structure and that it would seem to 

me that the lesson of our AIG report is do not allow that. 

Secretary GEITHNER. We are not going to support an outcome 

that would create that risk, and we are also—could I just elaborate 

on this for one second? We also do not want to support an outcome 

that will recreate the basic balance of risk-taking we saw in this 

system where people put a bunch of risks in separate affiliates 

with no capacity to constrain those risks, and that was not a good 

outcome for the system. 

Chair WARREN. Dr. Troske. 

Dr. TROSKE. I would like to talk a little bit about the CPP program and the use of that program for the small, or the non-stresstested banks. I guess I would like to hear sort of your rationale for 

why liquidity was invested in this part of the banking system, why 

this program was—what the goals were from this program. 

Secretary GEITHNER. Sorry. For the? 

Dr. TROSKE. The use of these funds for the small, the non-stresstested banks. 

Secretary GEITHNER. Excellent question. Two simple reasons. 

The first of these just guided everything we did in the crisis. 

Again, the central rationale for the Government’s emergency actions were to make sure that credit, which did not exist at that 

time, was going to be open again to American businesses and families because without that, there would be no recovery, no growth, 

no job creation. 

So for that reason, small banks, as you know, get about half of 

their credit from—small businesses get about half their credit from 

small banks. For that reason, we thought it made sense and it 

would seem fair to make sure that they had the same access to the 

capital programs that were initially put in place to stabilize the 

system. So for the reason of fairness and for the pragmatic reason 

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nesses, we thought it was important to make sure they had the 

same access to these programs as did the major Wall Street institutions. 

Dr. TROSKE. So staying with the smaller parts of the banking 

sector, our understanding—well, I did not work on the report but 

I did read the panel’s May report. It seems like many of these 

banks suffered some significant stigma associated with taking 

these funds. Large banks also seem to suffer from perhaps rules 

that they did not know that they were going to face going into the 

program, the rules regarding the payment of dividends and the 

payment of their executives, leading them to scramble rather 

quickly to get out of the program. And clearly this was an effort 

to inject liquidity into the system, something that is important to 

be able to do in a financial crisis. 

Looking forward, if we ever have another financial crisis, have 

these programs impaired our ability to inject liquidity into the system given the reluctance of many of these banks to—the seeming 

reluctance of many of these banks to participate under this current 

program? 

Secretary GEITHNER. I hope so in the sense that, again, the central challenge you face in designing reforms over the financial system is to reduce expectations that the Government will be there to 

protect you from your mistakes in the future. And that is why 

these reform bills are so important because they give us the tools 

to definitively alter those expectations, and that is very important 

because of the things that we had to do in the crisis to put out the 

financial fire. 

Dr. TROSKE. I guess I would make a distinction between injecting 

liquidity into the system and providing support for failing institutions. They are very different roles, as you are well aware. So I 

think it is important to maintain the ability to inject liquidity into 

the system because I view the support that was given to small 

banks as more of an injection of liquidity since presumably, as you 

indicated already, they were healthy banks. They were not failing 

institutions. 

Secretary GEITHNER. I, of course, completely agree with you that 

a necessary part of the arsenal tools you need in a financial crisis 

is to make sure that institutions that are solvent can fund themselves. Without that, nothing is possible and the system will come 

crashing down, as our system almost did. Back in September 2008, 

we were on the verge of a classic run on a banking system, something we had not seen since the Great Depression. So for that reason, I completely agree with you that a central part of the arsenal 

of response is to make sure that governments have the ability to 

meet the funding needs of solvent institutions. 

But, again, in doing that, preserving that flexibility, you will also 

have to make sure that people do not make judgments about how 

much they lend to institutions, how much risk they take on the expectation the Government will be there again if they were mistaken or imprudent in their judgments. And that is the classic vital 

challenge of reform. 

Dr. TROSKE. Let me change gears just a little bit and turn to the 

housing market, which has been mentioned a couple times before. 


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For almost 30 years, between 1965 and 1995, the rate of home 

ownership in this country was stable at 65 percent. Starting in 

1995, it grew quite dramatically through actions of a variety of different people to about 69 percent. 

My own view of the housing market is, one, we are not going to 

return to stability until we return to a rate in which 65 percent of 

households own their own homes. We are currently somewhere between 68 and 67 percent. 

Many of the programs that have been enacted seem to sort of 

simply extend this process through which we get back to a rate of 

home ownership that is more sustainable. Would a better program 

not be one which was designed to move people into a more appropriate housing situation as opposed to keeping them in one that is 

just not sustainable over the long run? 

Secretary GEITHNER. I think you are describing exactly the objectives that have shaped this program, which is why it is subject to 

so much criticism from people who had hoped that the program 

would be designed to keep a much larger fraction of Americans in 

their homes. Our program was designed exactly as you said, to 

make sure that those Americans—and there are many—who have 

a realistic prospect of staying in their home, who can afford to stay 

in their home in that context, have the option and the chance to 

do that. But this program was not designed to prevent foreclosures. 

It was not designed to sustain home ownership at a level that 

would be unachievable and imprudent to try and do. There is no 

perfect way to strike that balance, but we have tried to do something that is very close to the test you laid out. 

Dr. TROSKE. Thank you. 

Chair WARREN. Superintendent Neiman. 

Mr. NEIMAN. Mr. Secretary, I would like to come back to your recent remarks about community and regional banks as a key source 

of credit for small businesses, because much of the public focus and 

our prior COP reports have been on the largest TARP recipients 

that were part of the stress tests. Our July report that we are 

working on at this very moment will provide a unique kind of window into the performance and health of the hundreds of banks participating in the program and to attempt to assess the effectiveness 

of the TARP program for those banks below the top 19. 

So to help us to focus on that—and before assessing Treasury’s 

effectiveness—we need to understand the clear goals. I think you 

just referenced two: one, fairness and providing small banks with 

the same access to capital as the larger banks and two, lending. 

Do you want to expand upon that or are those the two critical 

issues? Was the focus on lending? Was the focus on the health of 

the community banks together, maybe as too many to fail as opposed to too large to fail? 

Secretary GEITHNER. Basic objectives of our strategy again are to 

make sure we are safeguarding the financial security of Americans 

and that we have a financial system that is able to meet the credit 

needs of Main Street America. So everything we did was shaped by 

those two basic objectives. 

Now, because as you said, you know, we are a Nation of 9,000 

banks, not 12 banks, not 25 banks, 9,000 banks and most small 

businesses get most of their credit from small banks. 


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Mr. NEIMAN. And as I recall I think we had only about 700 community banks participating in that program. 

Secretary GEITHNER. Exactly. Right now we have roughly $11 billion of investments remaining in banks that are below $10 billion in assets. Somewhat less than 600 banks meet that test. 

Again, we did that for the simple reason of fairness. We thought 

they should have the same access to this set of investments that 

we gave the major institutions, and we did it because we thought 

it would be important to try to make sure that their business customers and individual customers had a better chance of getting 

through this with access to credit on affordable terms. It is a simple, pragmatic rationale. But as you said, it is still a challenge for 

many of those banks and therefore for many of their business customers. 

Mr. NEIMAN. What would be your assessment of the program in 

meeting those goals and particularly how those banks utilized that 

capital? 

Secretary GEITHNER. The available evidence on how they use the 

capital is quite favorable. Just to give you one basic measure, if you 

compare small banks that took TARP capital against those that did 

not, the former category increased lending at about twice the rate 

of banks that did not take TARP capital. That is a pretty good, 

simple measure. We are happy to share with you all the details of 

that assessment. 

And of course, for many banks, access to TARP capital meant 

they did not have to reduce lending to meet their capital requirements. So you have that test again. 

Again, the best test is what has happened to the cost of credit, 

but it is still hard to get. But I think that it has been available. 

Now, having said that, fundamentally this program did not meet 

our objectives because, as many of you have pointed out, because 

of concern about the conditions that might come in the future, because of concern about the stigma of the appearance that you participated in these programs out of weakness and not out of 

strength. We had banks by the hundreds I think pull back their applications from the Treasury and from their primary regulator for 

capital because they did not want to be subjected to either the stigma or to the fear of conditions, which is why we have legislation 

now pending before the Congress—it has been pending now for six 

months—to build outside of TARP and outside of those risks a very 

carefully designed set of programs at the State level and the federal level to help small banks get through this. 

Mr. NEIMAN. And your level of confidence that that program will 

overcome the TARP stigma and attract demand? 

Secretary GEITHNER. Very high. But, again, you have to judge it 

relative to the alternative. We looked at a whole range of alternatives. This seemed to offer the best prospects of breaking that set 

of constraints. 

Mr. NEIMAN. We have a program in New York that you may well 

remember from your days at the Fed, the New York Business Development Corporation. It is comprised of member banks which not 

only provide equity but wholesale funding and it acts as a lending 

consortium for loans to small businesses, and it makes loans that 

were marginal credits that the individual funding banks may not 


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have made. So we have raised this on a number of occasions and 

would offer it to you as a suggestion maybe for consideration at the 

national level because of not only taking second looks at loans 

passed up by member banks but also spreading risk and providing 

expertise in a particular business lending. I do not think it is clear 

under the SBLF that the banks could utilize this capital to leverage investments or lending to bank consortiums. 

Secretary GEITHNER. Well, I actually think we have this thing we 

call the State option that exists in this draft legislation alongside 

the small business lending facility, and that option is designed to 

provide support for exactly those types of programs. There is a 

great diversity of those programs across the country with a long 

history people can look at to figure out what makes the most sense. 

Again, the virtue of the way we designed this is you have a new 

Federal program designed so that if you increase lending, the rate 

of dividends you pay the Treasury goes down. That is a pretty good 

incentive for using it to increase lending, but also we are providing 

a significant amount of assistance to States across the country that 

have those programs so that we are, in a sense, financing a greater 

diversity of programs as well. 

Mr. NEIMAN. Great. Thank you. 

Chair WARREN. Thank you. 

I was surprised by your answer to Dr. Troske about the metric 

for success on the home mortgage foreclosure program. So I had 

not intended to ask you about this, but I want to go back. I pulled 

out some numbers and looked at this. 

Over the 15 months that the program has been in effect, there 

have been 347,000 so-called permanent modifications. Fitch now 

has come out with an analysis that says about two-thirds of those 

are going to fail. So that means that over 15 months, at least by 

their estimate—and correct me if you think you have a better estimate—but over 15 months, the HAMP program may save 120,000, 

that is, permanent modifications, people who do not slip and lose 

again. That is against about 186,000 every month that are newly 

posted defaults and foreclosures. 

So now I am caught in the question of what is your metric for 

success here. 

Secretary GEITHNER. Let us step back for just one second and 

look at the basic strategy that the President put in place alongside 

the Fed. 

First, we acted to bring down mortgage interest rates. That was 

very important to put some floor under house prices, and we acted 

to make it more likely and more possible that millions of Americans would be able to refinance their homes to take advantage of 

lower interest rates. 

Chair WARREN. Mr. Secretary, I am familiar with all that you 

think you have done to support housing overall. 

Secretary GEITHNER. Right. But the—— 

Chair WARREN. The question is HAMP is designed to deal with 

families facing foreclosure. More than a million families this year 

will lose their homes to foreclosure. The best estimates are that 

will happen next year and the year after. We are talking about literally millions of families who will lose their homes to foreclosure. 

HAMP is it, by and large, for them. 


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Secretary GEITHNER. No. Well, again, what HAMP does and 

what HAMP is designed to do—it was not designed to prevent all 

foreclosures. It could not be designed to do that. 

Chair WARREN. I understand that. So my question is what is the 

metric for success? 

Secretary GEITHNER. What HAMP is designed to try to do is to 

make sure that a set of people facing the risk of foreclosure have 

the chance of being able to afford the challenges of staying in their 

home. 

Again, on the numbers, more than 1.5 million were offered trial 

modifications. 1.2 million received trial modifications. As you said, 

only part of those are being converted to permanent, but a substantial fraction of those that are not are being able to take advantage 

of other loan modification programs and therefore have a chance to 

stay in their homes. 

Chair WARREN. Well, as Superintendent Neiman said—and we 

will find out what the consequences of that are, whether they are 

good or bad—we know that the early modification programs actually got people into more trouble, raised their overall payments, 

had them owing more principal than they had started out with. 

This is HAMP. You set aside $50 billion and what do you have to 

show for it? 

Secretary GEITHNER. Well, again, what we have is 1.2 million 

Americans who got an average of a $500 reduction in their monthly 

payments at an early stage in this crisis that was critical and 

therefore a chance to keep their homes. That was enormously effective. 

Chair WARREN. And passed up other opportunities they might 

have had to deal with their home—they might have fought their 

foreclosures. The point is they ultimately lost their homes. 

Secretary GEITHNER. No, no. 

Chair WARREN. What is the metric for success here? Is it 120,000 

families saved over 15 months at a time when 186,000 are posted 

for new defaults and foreclosures every month? Is that a successful 

program? How do we decide when the program is working? 

Secretary GEITHNER. You look at its results family by family, 

foreclosure by foreclosure, change in monthly payments by change 

in monthly payments, but recognizing that—and on this, I think we 

agree—these programs were not designed and could not have been 

designed responsibly to try to prevent a set of foreclosures that 

tragically were probably unavoidable—— 

Chair WARREN. Then help me with a metric. The question I want 

to understand, are you telling me that preventing one foreclosure 

would have been enough for our $50 billion? 

Secretary GEITHNER. No, no. I am just—— 

Chair WARREN [continuing]. No. So what is an appropriate metric? Did you have an estimate when you started this of how many 

families you could save? 

Secretary GEITHNER. Our challenge is we have tried to reach as 

large a fraction of eligible homeowners as we could, and we are still 

working toward that objective. And again, the virtue of the approach we have laid out is we have given everyone detailed numbers that they can look at not just on—— 


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Chair WARREN. Forgive me, Mr. Secretary, but you say we designed the program from the beginning, in effect, you are saying, 

not to save everyone. I understand that point. But you designed it 

around servicers. You designed it around servicers who—I wrote it 

down when you said it. Servicers have done a terrible job. You designed it around voluntary participation, relying on these servicers. 

We only have three months left with hundreds of thousands of 

families facing foreclosure. Is it time to rethink whether or not a 

mortgage foreclosure prevention program that is based on a group 

of servicers whom you describe as having done a terrible job is a 

program that perhaps should be redesigned? 

Secretary GEITHNER. As I said, these programs will outlast the 

expiry of TARP. Because the way TARP was designed, we have the 

ability to continue to execute these programs going forward, and 

we will do that. And as you have seen, we have added to the basic 

framework of the loan modification scheme a series of additional 

programs, again, to help improve the odds that we reach as many 

people as we can reasonably expect to reach to meet at this point. 

We are going to keep working on that. 

And, Chair Warren, I will never stand before this body or any 

other body and over-claim for what this program is delivering. And, 

again, the reason why we have put out these numbers is because 

you can see, therefore, where servicers are getting better. You can 

see—— 

Chair WARREN. We must stop, Secretary Geithner. I am running 

over and it is not fair to my colleagues. 

Mr. McWatters. 

Mr. MCWATTERS. Thank you. 

Mr. Secretary, if you could turn back the clock to the last quarter 

of 2008, what changes would you make to EESA and the TARP legislation? What can we learn from your experience? 

Secretary GEITHNER. I do not feel in a position today to answer 

that question thoughtfully enough. Again, the best thing I can tell 

you today is that the reforms we proposed, that Congress is on the 

verge of enacting, would give us a much stronger set of tools for 

preventing these crises from happening and managing them with 

less cost to the taxpayer and the economy in the future. And what 

we are focused on doing is getting that passed and enacted and 

making sure it is followed by a set of well-designed constraints on 

risk-taking so that we can, again, tell the American people that we 

have a reasonable chance of preventing this from happening again. 

And that is what I am focused on at the moment. 

On the details of how you design financial crisis rescue programs, the basic framework in that reform bill is a very strong 

framework, much better than what we had coming into this crisis. 

Mr. MCWATTERS. Okay. By unanimous vote of the panel—it was 

a 4–0 vote, completely bipartisan with the recusal of Superintendent Neiman—two weeks ago, the panel adopted its report on 

the bailout of AIG. Even though the report exceeds 300 pages, 

allow me to read five of the key conclusions reached by the panel. 

‘‘The Government failed to exhaust all options before initially 

committing $85 billion in taxpayer funds to the bailout of AIG. 


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‘‘The rescue of AIG distorted the marketplace by transforming 

highly risky derivative bets into fully guaranteed payment obligations. 

‘‘Throughout its rescue of AIG, the Government failed to address 

perceived conflicts of interest. 

‘‘Number four, even at this late stage, it remains unclear whether taxpayers will ever be repaid in full. 

‘‘Number five, the Government’s rescue of AIG continues to have 

a poisonous effect on the marketplace.’’ 

I think it is only fair that you be permitted to respond. 

Secretary GEITHNER. Well, I do not agree with those conclusions 

except perhaps for the fourth which says, as I say all the time, that 

the Government is still exposed to substantial risk of loss in AIG. 

But it is worth just making the following observations. 

This mess that we were handed in the peak of the crisis ultimately required, to stabilize the firm, commitments of, I think if 

you add them up together, something in the range of $180 billion. 

On the basis of the independent estimates of CBO and others, the 

ultimate risk of loss now has come down dramatically—it is still 

significant—but dramatically, a tiny fraction of that ultimate exposure because we have been so successful and careful in managing 

this process to lower the risk of the taxpayer in this case. And we 

are going to be continually focused on trying to make sure that we 

are bringing down the risk, we are selling off these companies to 

maximize the return and minimize the risk of loss. And we are 

working very hard, as you know, to make sure that we have a set 

of reforms in place and financial reforms that would prevent that 

from happening again and give us better choices. 

And I am very confident, based on the strength of the provisions 

on derivatives, on risk-taking, on resolution authority, the basic 

package of these protections, that we will be in a position to both 

prevent and better manage mistakes like that that AIG and its 

shareholders, its board of directors, its executives made. 

Mr. MCWATTERS. On a slightly different, but I think related note, 

when does the Administration plan to return Fannie and Freddie 

to the private sector? 

Secretary GEITHNER. I am not sure I would frame it quite that 

way, but let me answer it this way. 

We are deep into a process of examining what set of reforms 

should replace the current system we have in the housing finance 

market. Those will require fundamental changes to the GSEs, but 

we are not going to stop there because, as you know, the range of 

things that contributed to this mess went well beyond the basic incentive problems, moral hazard problems that pervaded the GSEs. 

I expect that after we pass this first wave of financial reforms, that 

we will be able to turn quickly, as will the banking committees, relevant committees in Congress, to examine those sets of options. 

And I have said publicly that we expect to recommend a set of 

broad reforms sometime early next year, which means roughly six 

months from now. 

Now, it is very important to point out that the losses that we still 

face in these institutions are losses we inherited. They are the 

product of the judgments made before the Government stepped in. 

At our insistence, they have put in place much more conservative 


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underwriting standards. They are charging more for their guarantees to remedy some of the mistakes they made. They are bringing 

down risk in the rest of the institution quite significantly. So the 

institutions today are being run much more conservatively, as you 

would expect. 

I think we are going to find—I hope we will find—quite broad 

support in Congress, Republicans and Democrats, for putting in 

place the kind of fundamental reforms that these institutions and 

the housing market obviously needs. 

Mr. MCWATTERS. Thank you, Mr. Secretary. My time is up. 

Chair WARREN. Thank you. 

Mr. Silvers. 

Mr. SILVERS. Mr. Secretary, I want to take you back for a moment to your response to a question from my fellow panelist who 

cited home ownership levels from 1965 to 1995 as something we 

ought to be aspiring to. And you responded something to the effect 

of that is exactly where we are trying to get to. 

I want to give you the opportunity to modify that answer. 

Secretary GEITHNER. To rephrase my response? 

Mr. SILVERS. Yes, because from 1965 to 1995, that flat number 

reflected essentially the systematic denial of credit to communities 

of color. That cannot be our goal to return to that time. 

I would also like to give you an opportunity to modify your response in light of what has troubled me about our discussion about 

housing throughout this morning, which is that the shift to unemployment-driven foreclosures, which I think is evidenced in your exchange with Superintendent Neiman, around the question of people’s ability to pay. It cannot be our policy that we think that people who are the victims of long-term unemployment should be 

thrown out of their homes. So I would like you to—— 

Secretary GEITHNER. Excellent questions. 

Mr. SILVERS [continuing]. Give yourself some time to clarify 

these matters. 

Secretary GEITHNER. Excellent questions. And I agree with the 

way you characterized that little history of evolution in our financial system and how it met the broader needs of the country. 

What I want to say is this. Our policies are not designed to sustain home ownership rates at a level that we think is not sustainable. It should not be our objective, cannot be our objective. And 

I think it is true that although there have been huge gains from 

the broad evolution of our financial system in meeting the needs 

of not just low-income and minority communities, but more generally across this country, it played a huge role in financing innovation among small businesses too. We are going to do our best to 

preserve those gains but not leave the country and our financial 

system and the economy vulnerable to the excesses that we saw. 

Of course, as you pointed out, those big gains in access to credit 

that our system generated also came with huge opportunities for 

predation and fraud and abuse. That happened not because of the 

presence of regulation. It happened because of the absence of regulation on a whole range of institutions that were allowed to provide 

credit without basic protections. One of the virtues of this reform 

bill is it protects that. 


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Now, we do not have a perfect judgment about what is a sustainable rate of home ownership. What we do know is we had a whole 

range of incentives across the American financial system that were 

designed to encourage home ownership. And I think those, probably on balance, went a little too far. 

What I think is important to recognize in our broad housing policies—and this will be true for our reforms to the GSEs and the 

housing finance market—we are going to try to remedy some of 

those problems in balance, try to preserve what is fair and important in trying to make sure that Americans have access to affordable housing programs, but not try to sustain or recreate a level 

of investment in housing that was part of this basic crisis. 

Now, having said that, I have forgotten your second question. 

Mr. SILVERS. Unemployment. 

Secretary GEITHNER. Yes. Thank you for doing that. 

We have done a continuous series of innovations and changes to 

these programs from the beginning, as you heard me describe. And 

one of the things we did, starting earlier this year, was introduce 

programs that are designed to directly help the unemployed reduce 

the risk that they would lose their home, but also to shift the balance of benefits in this program to encourage greater principal reduction. 

And also, much like what I said to Mr. Neiman on the small 

business credit side, we have introduced a program where we give 

States hardest hit by the crisis, States with the steepest drops in 

house prices, highest levels of unemployment, or a combination of 

those two factors, access to significant resources to finance a range 

of programs to help the unemployed in their States, to help encourage greater principal reduction, a range of other types of innovative 

programs at the State level. 

That is a sensible use of public policy, a sensible use of resources 

again, because as you said, unlike the early stage of the foreclosure 

crisis, the principal driver we see today is the result of the fact that 

unemployment is still so high. 

Mr. SILVERS. Two points in response, Mr. Secretary. One is I 

think there is an issue of scale in relation to the unemployment 

problem. The scale of the resources simply is not adequate. I think 

we have models, the HEMAP program in Pennsylvania, for how to 

do that at scale. You have got three months. I hope you are thinking about that. 

Secondly, in relationship again to the question of the level of 

homeownership, I think the data shows very clearly, contrary to I 

think what some of my colleagues would say, that we made significant progress in reversing decades of redlining during the 1990s, 

and that starting around 2002–2003, we saw a set of unsustainable 

and exploitive practices take over. I think that kind of gives you 

a way of marking what constitutes a sustainable level of home 

ownership and what does not. 

Secretary GEITHNER. I think that is a very good perspective, and 

that is one good way to think about it. 

But you also have to look at the combination of all sorts of other 

incentives we created and it is hard to find the right balance. 

Can I correct one other thing I said, Ms. Warren? 

Chair WARREN. Yes, Mr. Secretary. 


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Secretary GEITHNER. I said at some point in my remarks earlier 

that 8 million Americans were out of work because of the crisis. 

The number is about double that, but roughly 8 million have lost 

their job in this crisis. 

Chair WARREN. Thank you, Mr. Secretary. 

Dr. Troske. 

Dr. TROSKE. I guess I would like to clarify that I certainly do not 

believe that we should have a process which denies people ownership of a home or financing for a home by any reason other than 

income. But I do think it is important to point out that no one 

should be homeless. But those are two different things. And I think 

it is also important to recognize that not everyone needs to own a 

home. Renting a home is a perfectly viable option. And I think it 

is important to match people correctly to the ownership situation 

that best fits their financial situation. 

So one of the things I was suggesting is that maybe programs 

that help move people out of a situation which is not appropriate, 

given their financial situation, into one that is appropriate, even if 

it is not owning a home, but instead renting, which seems like a 

perfectly viable option in a number of other places in this world. 

What might be a better use of resources than trying to keep people 

in their homes, especially since our experience with loan modification and programs designed to keep people in their homes in the 

Great Depression suggests that they are not particularly effective? 

So maybe you could comment on that. 

Secretary GEITHNER. I have some sympathy for that perspective, 

and we do have a set of programs that we are supporting that are 

consistent with that basic recognition and reality. 

But I think it is important to step back for a second and recognize the things we got wrong in this area because they should 

guide how we think about reform going forward. Again, not to oversimplify it, but the two most damaging mistakes that Washington 

made in this crisis were, one, not to constrain risk-taking in the 

mortgage finance market by the GSEs, and the other was not to 

provide Americans basic protections against predation, fraud, and 

abuse in the credit market. Those were devastating in their consequences. We are still living with the consequences of that. We are 

going to be living with them for a long period of time. 

And a fundamental responsibility of Washington is to try to help 

make sure that we are repairing those mistakes and helping people 

who were damaged by those mistakes have a chance to repair their 

lives in that context. And that is a responsible, good use. 

Now, we recognize that we cannot reach everyone, and different 

solutions are going to be appropriate for different people, and that 

we have got a lot of challenges ahead in that area, but those two 

mistakes are things that we have to make sure we fix in financial 

reform and I am very confident we are going to be able to do that. 

Dr. TROSKE. So maybe we will stay on the housing market for a 

minute to build on some of the comments that have been made previously. 

Do you think the Federal Government should be involved in a 

significant way in the future of financing in the mortgage market? 

Does the Federal Government have any particular advantage over 


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the private sector which would suggest that the Federal Government needs to maintain a role in that sector? 

Secretary GEITHNER. Excellent question. I have testified on this 

before and I do not want to change or alter the basic framework 

I have laid out in that context. So I would say it this way. 

I think there is going to be a good public policy case for the Government still promoting the objectives of access to reasonable housing options for low-income Americans. That is an important objective. I believe in that objective. We are going to make sure we are 

doing it as carefully as we can going forward. 

I also believe it is likely that we will determine that it is going 

to be an appropriate role for the Government in providing some 

form of guarantee to help make sure that their broader housing finance markets are able to provide credit to housing in recessions 

and downturns. That is a very important basic debate. We are 

going to have that debate when we talk about reforms. But having 

looked at a variety of different models in our experience, I think 

that we are likely to conclude that there is going to be a reasonable 

case for retaining a limited role for the Government providing that 

kind of basic guarantee. How to do that is a challenge. We want 

to make sure that where you do that, firms have to pay for that 

guarantee and that the firms that provide that guarantee run with 

adequate capital against risks. But I want to be careful not to add 

to anything I have said in the past about this, and these are the 

kind of questions that we are looking at in the context of reform. 

Dr. TROSKE. So maybe I can finish up with one more question. 

You seem to be much more positive about the effectiveness of 

TARP than the American public. Could you tell me why you think 

that is? What do you know that the American public is not aware 

of, and why has that not been conveyed to the American public? 

Secretary GEITHNER. I think that the American public was left 

with the impression that the Government of the United States 

came in and wrote checks for $700 billion to our Nation’s largest 

financial institutions and that they will never see that money 

again. And that initial perception that was created by the critics 

of this program hardened and has been a challenge, as you on this 

committee have found, particularly those who were here from the 

beginning. 

The reality, of course, is very different. As I said, we have only 

put out about half of that authority. We have more than half back. 

This administration came into office, did not write a single check 

to our Nation’s largest banks. We wrote $7 billion of checks to 

small community banks across the country. And as I said, this program on the bank side is generating a very substantial, positive return to the American people, and we are going to return hundreds 

of billions of dollars of authority—how often does that happen in 

Washington—to the Congress so they can help reduce our future 

deficits and meet our long-term needs. 

Those are the facts and realities of this program, and if you compare that record, not just against the expectations of the critics, not 

just against the expectations of the architects, but against the experience of this country in past crises or the experience of almost 

any major country in a crisis, it is a remarkably effective program, 


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highest return on the use of a dollar of taxpayers’ money than I 

think almost anything the Government has done in this crisis. 

Now—— 

Chair WARREN. Mr. Secretary, this is your time, and we are over 

the time. I still want to give Superintendent Neiman a chance for 

a last round of questions. So if you will bear with us. We are past 

the time. It is your time. 

Secretary GEITHNER. But acknowledging that this caused a huge 

amount of damage, we are going to be living with the aftershocks 

of that for a long time, and we are still in the beginning of repairing that basic damage and it is going to take more time. 

Chair WARREN. Thank you, Mr. Secretary. 

Superintendent Neiman. 

Mr. NEIMAN. As I mentioned in my opening statement, Congress 

is finalizing financial reform that will have implications for decades, both domestically and internationally. Many of us are glad to 

see the U.S. acting as a first mover in regulatory reform. I have 

been told on a number of occasions by foreign government officials 

how they are very pleased that we are moving ahead, though they 

probably are not saying this as publicly as they should. 

I am especially proud of particular areas where we are ahead of 

the rest of the world, things like the Volcker Rule, like proper 

alignment of executive pay and risk. However, we all know that 

acting as a first mover does raise issues around global competitiveness, regulatory arbitrage, and regulatory gaps around the world. 

Would you mind sharing with us the standard that you apply 

when determining when the U.S. must lead and when the U.S. 

must act in global concert? 

Secretary GEITHNER. We are trying to do so together. We are acting, as you know, to fix the things we got wrong, but at the same 

time we laid out our basic objectives for reform, we negotiated 

internationally a broad consensus on a set of broad objectives internationally that would parallel very much the basic strategy we 

adopted here. And you are going to see when the G–20 leaders 

meet in Toronto on Saturday and Sunday a remarkable commitment across the major economies to that set of basic principles for 

providing better oversight, better transparency and disclosure, better protections against risk-taking on a more even standard across 

the major institutions and markets. 

We could have decided to move here and then try to put in place 

high standards here and try to pull the world to those standards 

over time. We decided to move together so we would reduce the 

risk that risk would just move from the United States to those 

other countries. 

Now, we have a very difficult challenge ahead in negotiating a 

new set of capital standards for the globally active banks, and that 

will be the critical test of our capacity again, to pull the world to 

higher standards. But we come to that with a remarkably strong 

position because we were able to move so quickly in the United 

States to recapitalize our system with private capital to replace the 

Government’s investments early and, therefore, our firms on most 

measures have less leverage, more capital, more of the kind of capital that you need, common equity, against future losses. And that 

gives us a very strong position in those discussions. 


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But again, the best way for us to shape that consensus is to 

make sure that we come to the table, having acted to fix the things 

we got wrong in the United States—and I believe that the reforms 

Congress is about to enact will be a good model for the world and 

will give us enormous credibility in trying to, again, pull the world 

to those higher standards. 

Mr. NEIMAN. Are there other examples like capital where the 

U.S. has to act as a first mover if there is not global concert in that 

particular area? 

Secretary GEITHNER. Again, we are going to try and make sure 

we are moving in parallel. Derivatives is another good example. 

Any financial product of consequence today can move very quickly 

to seek the weakest regulation. In the basic standards of disclosure 

and transparency that have been such a source of interest for this 

committee over time, again, we want to make sure that all these 

firms and all these markets are operating under much more rigorous standards for disclosure and transparency. Otherwise, the 

risk will move to where it is dark and that will leave us with more 

risk in the future. 

Mr. NEIMAN. My time has expired. 

Secretary GEITHNER. There are many other examples, though, 

but you are right about the basic imperative. 

And again, we are going to try to make sure that we dramatically strengthen the competitiveness of the U.S. financial system 

by, as we have done well in the past, making sure that we put in 

place very high standards for protection for investors in the U.S. 

marketplace. And we are going to do everything we can to make 

sure the world joins us in that cause. 

Chair WARREN. Thank you. We now bring to a conclusion our 

21st hearing of the Congressional Oversight Panel. We want to 

thank you, Mr. Secretary, for being with us today. 

The record will be held open for any additional questions. 

With that, this hearing is adjourned. 

[Whereupon, at 12:10 p.m., the hearing was adjourned.] 

[The responses of Secretary Geithner to questions for the record 

from the Congressional Oversight Panel appear on the following 

pages.] 


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